How the August CPI Report and Fed Rate Decision Could Impact Mortgage Rates

A hotter-than-expected August Consumer Price Index (CPI) report solidifies the likelihood of a modest 0.25 percentage point Federal Reserve rate cut next week. However, the data leaves the door open for a more aggressive 0.50 point cut if the Fed aims to preempt economic softening. For the housing market, mortgage rates are unlikely to see significant movement until the Fed’s official announcement, as they have already priced in an extended cutting cycle. This article breaks down the inflation data and what home buyers and owners can realistically expect.

What Did the August CPI Report Reveal About Inflation?

The key takeaway from the August report is that inflation, while still cooling, proved more persistent than economists predicted. The core CPI, which strips out volatile food and energy prices, is a critical measure watched by the Fed. It rose 0.3% in August from the previous month, slightly above the 0.2% increase that was forecast. This was the first positive surprise after four months of milder readings.

A significant driver of this increase was housing-related inflation. Both the rent of primary residence (what tenants pay) and owners’ equivalent rent (OER, an estimate of what homeowners would pay to rent their homes) categories saw noticeable jumps. It is crucial to understand that these metrics are backward-looking and lag behind real-time market data by a year or more. Current data from sources like Redfin indicates that market-rate rents have essentially stabilized, suggesting that the housing component’s contribution to inflation should decrease in future reports.

Will the Fed Opt for a 25 or 50 Basis Point Rate Cut?

The combination of firm inflation and a labor market that is not rapidly deteriorating makes a 0.25 point cut the most probable outcome for the Fed's upcoming meeting. However, a larger 0.50 point cut remains a possibility. With only three meetings left in 2024, committing to just 0.25 points per meeting risks disappointing financial markets, which expect more substantial cuts totaling over 0.75 points by year-end.

The Fed faces a delicate balancing act. Moving too slowly could allow the labor market to weaken further, a scenario Chair Jerome Powell has stated he wants to avoid. The most likely scenario is that the Fed enacts a 0.25 point cut while signaling openness to larger future cuts, either through its official Summary of Economic Projections or via Powell's comments in the press conference. A surprise 0.50 point cut is less likely but not impossible, as current interest rates may still be higher than what the economic data justifies.

What Does This Mean for Mortgage Rates and Home Buyers?

For individuals involved in the real estate market, the immediate impact is a period of waiting. Mortgage rates have likely already factored in an aggressive Fed cutting cycle extending into 2025. Therefore, they are not expected to drop dramatically immediately after the Fed's announcement. The direction of rates in the medium term will depend on the Fed's communicated trajectory.

• For home buyers: A 0.25 point cut is unlikely to suddenly drastically improve affordability. The focus should be on the Fed's overall tone. A commitment to future cuts could lead to a gradual, sustained decline in mortgage rates over the coming months.
• For homeowners considering a refinance: The same principle applies. A single small cut may not be enough to make refinancing worthwhile unless you are on the cusp of a beneficial rate change. Monitoring the broader trend is more important than reacting to a single meeting.

Based on our experience assessment, the most practical advice is to base your real estate decisions on your personal financial situation and long-term goals, rather than trying to time the market based on a single Fed meeting. While a more aggressive cutting path would be beneficial for housing affordability, the data suggests a cautious, measured approach from the Fed is the baseline expectation.