A key measure of inflation declined in September in line with expectations, setting the stage for a Dec. 10 Federal Reserve rate cut. But Friday’s data release is having little impact on mortgage rates, with investors having already priced in three to four Fed rate cuts this year and next as the economy cools.
The Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) price index, showed core inflation declined in September for the first time since April.
The CME FedWatch tool, which tracks futures markets to predict the probability of future Fed moves, showed investors on Friday were pricing in an 87 percent chance of a Dec. 10 Fed rate cut, up from 30 percent on Nov. 19.
But yields on 10-year Treasury notes — a reliable barometer for mortgage rates — were up three basis points on the news, as investors weighed the long-term implications of the latest reading of the PCE price index, which was delayed by the October government shutdown. A basis point is one hundredth of a percentage point.
Lender data tracked by Mortgage News Daily showed rates on 30-year fixed-rate mortgages moving up by the same amount on Friday.
The fundamentals for consumers in the months ahead “look challenging,” with after-tax incomes up by just 0.4 percent from a year ago due to the weak labor market and tariff-driven upturn in inflation, analysts at Pantheon Macroeconomics said in a note to clients Friday. Those headwinds “are likely to remain both this quarter and next,” they said.
After the Fed cut rates for the second time this year, Fed Chair Jerome Powell warned on Oct. 29 that a December rate cut was not a given. But a Nov. 20 report showing unemployment ticked up to 4.4 percent in September put another rate cut this year back in play.
The Fed’s preferred inflation gauge
The core PCE price index, which excludes more volatile food and energy prices, showed annual inflation dropping from 2.9 percent in August to 2.82 percent in September.
The headline PCE price index, which includes food and energy costs, showed inflation moving away from the Fed’s 2 percent target for the fifth month in a row, hitting 2.78 percent in September.
Annual inflation as measured by the core PCE price index hit a high of 5.61 percent in September 2022. After dropping to a 2025 low of 2.61 percent in April, core inflation began climbing as tariffs implemented by the Trump administration started getting passed along to consumers.
Consumers are currently paying average effective tariff rates of 16.8 percent on imported goods, or $1,700 a year for the average household, according to the latest estimates by The Budget Lab at Yale.
The Supreme Court on Nov. 5 heard oral arguments on the legality of the Trump administration’s so-called reciprocal tariffs, and is expected to issue a ruling this month.
Pantheon Macroeconomics economists estimate that inflation added about four-tenths of a percentage point to annual core inflation in September, which would have dropped to 2.4 percent if excluded.
“We continue to expect the tariff-related boost to inflation to top out at [seven-tenths of a percentage point] in March, and ex-tariffs inflation to continue to decline as wage and rent increases moderate,” Pantheon Macroeconomics economists Samuel Tombs and Oliver Allen said in a note to clients Friday.
By the end of next year, Pantheon Macroeconomics forecasts that core PCE inflation will probably still be “slightly” above 2 percent, but that progress towards the Fed’s target will be enough for policymakers to cut short-term interest rates by another three-fourths of a percentage point in 2026.
Futures markets tracked by the CME Fed Watch tool showed investors think the latest data release has shifted the odds in favor of just two rate cuts next year totaling half a percentage point.
Since spiking to nearly 7 percent in April and May over tariff fears, mortgage rates have gradually come down, hitting a 2025 low of 6.12 percent on Oct. 28, according to lender data tracked by Optimal Blue.
Mortgage rates near 2025 low
As mortgage rates have come down, they’ve also benefited from a narrowing of the “30-10 spread” between 30-year fixed-rate mortgages and 10-year Treasury yields.
The 30-10 spread, which averaged less than two percentage points during the decade before the pandemic, widened to three percentage points at times in 2022 and 2023, adding to the pain of rising mortgage rates.
As mortgage rates peaked, investors in mortgage-backed securities who fund most home loans were demanding higher returns to offset the “prepayment risk” posed by homeowners refinancing if rates came back down.
Now that mortgage rates are falling, prepayment risk is shrinking. At 2.11 percentage points as of Dec. 3, the 30-10 spread is approaching its historical average — good news for homebuyers.
Forecasters are divided about how much more room mortgage rates have to come down.
Mortgage rate forecasts diverge
Source: Fannie Mae and Mortgage Bankers Association November 2025 forecasts.
Fannie Mae economists predict rates on 30-year fixed-rate loans will fall below 6 percent by the end of next year, but forecasters at the Mortgage Bankers Association expect they’ll average 6.4 percent in 2026.
The Fed doesn’t have direct control over mortgage rates, which are determined largely by MBS investor demand. After the Fed approved three rate cuts totaling a full percentage point at the end of 2024, mortgage rates went up by an equal measure when inflation surged.
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