Week Of: 05/04/26

 05-01-26 10:13am Headlines about the conflict in the Middle East continued to cause volatility for mortgage markets this week. The Fed meeting revealed no significant surprises, and the economic data caused little reaction. Mortgage rates ended the week slightly higher.

As expected, the Fed left the federal funds rate unchanged for the third straight meeting at a range of 3.50 to 3.75%. Most of the attention focused on the unexpectedly large split for the decision. Just eight officials voted in favor of holding the federal funds rate steady, while four dissented, the most since 1992. However, only one official dissented based on a preference for a rate cut. The other three wanted to remove language in the statement which continued to indicate an "easing bias," suggesting that the next policy change would be a cut rather than a hike. Several officials would prefer more neutral guidance. Similarly, investor expectations have shifted in recent months, and they no longer anticipate any reduction in the federal funds rate this year, mostly due to inflationary pressures from higher energy prices.

Fed officials keep a close eye on inflation, and the PCE price index is their favored indicator. Core PCE in March was 3.2% higher than a year ago, up from an annual rate of increase of 3.0% in February and the highest level since November 2023. Progress toward the 2.0% target of the Fed has not been easy, and this desired level has not been achieved since February 2021.

Gross Domestic Product (GDP) is the broadest measure of economic activity. During the first quarter of 2026, U.S. GDP grew at an annualized rate of 2.0%, up from just 0.5% in the fourth quarter, but a little below the consensus forecast. Strength was seen in business investment, and economists estimate that spending related to Artificial Intelligence accounted for as much as 75% of all growth during the quarter. A rebound in government spending following the shutdown during the fourth quarter also contributed to the higher reading.

The latest home building data revealed mixed results. On the positive side, housing starts in March rose 11% from February, far exceeding expectations, to the highest level since December 2024. However, building permits, a leading indicator of future construction, fell to the lowest level since March 2025.

Looking ahead, attention will remain fixed on the conflict in the Middle East. Investors also will monitor comments from Fed officials about future monetary policy. For economic data, New Home Sales, JOLTS, and the ISM national services sector index will come out on Tuesday. The key Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation are always closely watched.

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