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December mortgage rate forecast
Mortgage rates are likely to slip a bit lower in December as inflation cools.
Rates dropped in November. It looks like they peaked in October and have started a gradual and unsteady decline. "Unsteady" means they might go up some weeks and some months, but the overall trend is expected to be downward through 2024. It's not a coincidence that the inflation rate has been falling, too.
Inflation is moving in the right direction
The Federal Reserve pays close attention to a gauge of inflation called the personal consumption expenditures price index. It especially heeds the core price index, which measures prices for everything except food and fuel, both of which tend to jump up and down like a running back who just scored a touchdown. The short-term highs and lows can obscure the deeper trend in prices.
The core PCE price index was 3.5% for the 12 months ending in October, down from 3.7% the previous month and 4.3% as recently as July. The declining inflation rate is welcome news for people hoping for mortgage rates to fall.
But inflation is far from its target
Mortgage rates have been falling since October because investors believe that Fed policymakers are optimistic that they're well on their way to taming inflation. But the outlook isn't quite that straightforward.
At 3.5%, the core PCE price index is a lot higher than the Fed's target inflation rate of 2%. So there's still quite a ways to go.
On the optimistic side: In a speech Nov. 28 at the American Enterprise Institute, Fed governor Christopher J. Waller said he is "increasingly confident that policy is currently well-positioned to slow the economy and get inflation back to 2%." He added that he "cannot say for sure" if the central bank is done with its rate increases, but he had to say that because he's a cautious Fed governor who sits on the monetary policy committee.
Waller's isn't the Fed's only voice, though. On the less confident side, another Fed governor, Michelle W. Bowman, told the Utah Bankers Association on Nov. 28 that she expects at least one more Fed rate increase. She, too, sits on the monetary policy committee, but her remarks didn't seem to gain as much traction in the mortgage market as Waller's.
How this forecast could go wrong
If rates rise in December, contrary to this mortgage rate forecast, it might be a result of higher-than-expected inflation reports. The overall economy grew quickly in the third quarter of 2023, and inflation could pick up again if economic growth doesn't slow in the fourth quarter.
The Fed's final monetary policy meeting of the year ends Dec. 13. The central bank is expected to leave short-term interest rates alone. If the Fed hints after the meeting that it's seriously thinking of hiking rates again next year, mortgage rates could rise.
November's prediction: What happened
At the beginning of November, I predicted that mortgage rates would plateau for much of the month, but "could succumb to upward pressure after Thanksgiving."
Instead of lingering on a plateau, or edging higher, the 30-year fixed fell from week to week all month as the economy repeatedly signaled that inflation is slowing and job creation is cooling. Those two phenomena working together pushed mortgage rates lower, before and after Thanksgiving.