Annual Inflation Eases, Fed Leaves Rates Unchanged

The Fed kept rates unchanged, annual inflation eased, and home prices continued to show strength. Here's what you need to know.

·       Fed Holds Rates Steady, Inflation Shows Improvement

·       Home Prices Maintain Momentum

·       At a Glance: GDP and Unemployment

Fed Holds Rates Steady, Inflation Shows Improvement

At Kevin Warsh's second meeting as Fed Chair, the Federal Reserve voted to keep its benchmark Federal Funds Rate unchanged at 3.50% to 3.75%. This marked the fifth consecutive meeting without a rate change, following a series of cuts late last year.

While the Fed Funds Rate does not directly set mortgage rates, it influences borrowing costs throughout the economy and helps shape the broader interest rate environment.

The decision to hold rates steady was widely expected, but the vote was not unanimous. Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan supported a quarter-point rate hike, citing in part concerns about ongoing Middle East tensions and the potential for rising energy prices to keep inflation elevated.

There was encouraging news on the inflation front. Headline Personal Consumption Expenditures (PCE) declined 0.1% in June, matching expectations and bringing the annual inflation rate down from 4.1% to 3.7%. Lower energy prices contributed to the softer headline reading, but underlying inflation also improved. Core PCE, which excludes food and energy prices, rose just 0.1% for the month, slightly below forecasts, while the annual core inflation rate eased to 3.3% from 3.4%.

Bottom line: While June's report showed inflation moving in the right direction, it remains above the Fed's 2% target. Policymakers continue to balance bringing inflation lower while avoiding unnecessary strain on a labor market that has shown signs of slowing.

Home Prices Maintain Momentum

Following solid gains in March and April, U.S. home prices increased another 0.6% from April to May per Case-Shiller, bringing the total gain over the past three months to 2.2%. After adjusting for normal seasonal patterns, prices were essentially flat, but home values remain 1.1% higher than they were a year ago.

A separate report from the Federal Housing Finance Agency (FHFA) showed a similar trend. On a seasonally adjusted basis, home prices rose 0.3% in May, while actual prices increased 0.8%. That followed gains of 0.7% in April, 1.0% in March, and 0.9% in February, for a combined increase of 3.4% over the four-month period. Compared to a year ago, prices for homes backed by conventional loans were up 2.2%.

Bottom line: While seasonal adjustments can make price growth appear more modest, home values have continued to trend higher this spring. For both homeowners and buyers, steady appreciation can add up over time. For example, a $500,000 home that appreciates 4% over a year would increase in value by about $20,000.

At a Glance: GDP and Unemployment

The first estimate of second quarter GDP showed the economy grew at an annualized rate of 1.5%, below expectations of around 2% and slower than the 2.1% pace recorded in the first quarter.

Growth was supported by consumer spending, business investment (particularly in AI data center construction) and exports. Those gains were partially offset by lower government spending, while higher imports also weighed on GDP because imports are subtracted in the GDP calculation.

On the labor front, initial jobless claims edged up to 197,000, while continuing claims dipped slightly to 1.782 million. The relatively low level of new unemployment claims may reflect workers who have shifted to gig or freelance jobs, which aren't always fully captured in traditional employment data. At the same time, the elevated number of continuing claims suggests many unemployed workers are still taking longer to find their next job.