The economy continued to show signs of cooling inflation over the last week, but investors are still uncertain about what the Federal Reserve's next step will be. Government data showed both the consumer price index (CPI) and producer price index (PPI) coming in better than expected for March. The CPI rose by 0.1% month-over-month which was below the 0.2% expectation. On an annual basis, CPI rose by 5%.

The PPI was a much more dramatic reading with the report showing PPI declined by 0.5% month-over-month against expectations of a flat reading. Even more encouraging was that the core PPI, which doesn't factor in the more volatile market costs like food and energy, decreased by 0.1% MOM whereas economists predicted an increase of 0.2%. The bond market reacted in a very nominal fashion with yields on the 10- and 2-year Treasury notes relatively unchanged.

Both the CPI and PPI are leading indicators of inflation which will factor heavily into the Fed's next decision about whether to raise the federal funds rate and by how much. It has been a full year since the Fed first initiated its quantitative tightening measures post-pandemic and the current rate sits in a range of 4.75%-5.00%. Many economists expect the Fed will increase the rate by another 25-basis points at the Federal Open Market Committee's next meeting May 2-3.

It is a good reminder that the Fed does not directly control what you see as your mortgage rates. The federal funds rate, also known as the overnight lending rate, controls what banks pay to borrow money from the central bank. The federal funds rate affects things like your credit card interest rate and other loans like auto and personal loans. That does have a very strong indirect effect on your mortgage rate because when it is more expensive for banks and other financial institutions to borrow money, that cost generally gets passed down to consumers. 

What is nice about the last few weeks is that we have hit a relatively stable patch in the economy that has helped hold mortgage rates mostly steady. Since the end of the brief banking crisis in March, the 10-year Treasury note yield has stayed within a pretty tight range of 3.3%-3.5% with the exception of a brief dip below 3.3% in the first few days of April. That has greatly benefitted the mortgage industry as it has prevented rates from being so chaotic.

Freddie Mac's 30-year fixed-rate mortgage average moved slightly lower over the last week, dipping by just 0.1% to 6.27%. However nominal the decrease, it was still a fifth straight week of declines which can have a really positive effect on consumer mentality. Freddie Mac's economists said of the reading, "Incoming data suggest inflation remains well above the desired level but showing signs of deceleration. These trends, coupled with tight labor markets, are creating increased optimism among prospective homebuyers as the housing market hits its peak in the spring and summer."The Mortgage Bankers Association's SVP and Chief Economist, Mike Fratantoni, had very similar remarks in the organization's weekly applications survey. The MBA's data showed the seasonally adjusted purchase index was up 8% week-over-week due in large part to the brief dip in rates at the start of the month. Fratantoni said, "Prospective homebuyers this year have been quite sensitive to any drop in mortgage rates, and that played out last week with purchase applications increasing by 8 percent. Refinance application volume was a mixed bag with total volume essentially flat, conventional volume down for the week, but VA refinance volume increasing. The level of refinance activity remains almost 60 percent below last year, as most homeowners are currently locked in at much lower rates."