Mortgage rates climb back to 6.49 percent — Fed seen holding July, hiking September

The May personal consumption expenditures price index released Thursday confirmed Wall Street's worst fears. The PCE index "surged 4.1 percent in the 12 months through May, the largest increase and first reading above 4.0 percent since April 2023," Reuters reported, and core PCE — excluding food and energy — rose to 3.4 percent, the biggest gain since October 2023. On a monthly basis, the index climbed 0.4 percent for the second straight month; core climbed 0.3 percent for the third month running.

The Associated Press framed it bluntly: "The Federal Reserve's preferred inflation gauge rose to a new three-year high in May as gas prices peaked, a sign rising costs could pose political problems for President Donald Trump and his political party as midterm elections near." CBS News reported the reading matched economists' forecasts and "represents the highest level since April 2023." The Wall Street Journal said the gauge "continued to rise" and is now more than double the Fed's 2 percent target.

Fed officials sounded resigned. Chicago Fed President Austan Goolsbee said inflation "is too high" but called new chairman Kevin Warsh "a serious guy," CNBC reported. On the goods side, much of the gain "was driven by energy, which jumped 6.5 percent, while services was pushed higher by transportation services, a sector sensitive to gas prices and which accelerated 0.8 percent," per the same CNBC report. New York Fed President John Williams said inflation pressures will moderate this year but remain too high. Goolsbee told Bloomberg he saw a "glimmer of hope" in services inflation even as underlying pressures remain elevated.

Markets are pricing the hawkish path. The Federal Reserve "is expected to hold rates steady in July, hike in September," Reuters reported, and a Friday Reuters dispatch noted "persistent rate concerns, as Thursday's Commerce Department data showing May PCE inflation at 4.1 percent, its highest since April 2023, reinforced expectations of a possible 25-basis-point Fed hike later this year," in its global markets flows graphic. Gold is on track for a fourth weekly loss on those hawkish bets, Reuters reported.

Mortgage rates up

The PCE data put fresh pressure on the housing market. The average rate on a 30-year U.S. home loan rose to 6.49 percent in the week ended Thursday, Bloomberg reported citing Freddie Mac, after holding "little changed from its range the past 6 weeks." The Wall Street Journal's mortgage dashboard put 30-year rates at 6.60 percent and noted "a majority of Federal Reserve members now foresee a potential rate hike by year's end."

The Journal's housing desk reminded readers Fannie Mae now forecasts rates "will remain steady above 6 percent for the remainder of the year" — a far cry from earlier 2026 forecasts that had rates dropping to the low 5-percent range. The Fed's June meeting kept the federal-funds rate in the 3.5 to 3.75 percent band but median projections show another 25-basis-point hike by year-end, the Journal noted.

Reuters said traders trimmed July hike bets but ramped up September odds. Martin Beck, chief economist at Public Policy Company, told Reuters that "May's PCE report serves as a reminder that the battle against inflation is ongoing, yet it does not provide clear evidence that underlying price pressures are escalating once more."

But for homebuyers, the practical result is the same. Bloomberg reported U.S. new-home sales fell 7.3 percent in May as elevated rates kept buyers on the sidelines.

Williams, the New York Fed leader, said he expects inflation readings "to start trending lower" and is "happy with interest rates at their current level," Reuters reported, in a sign internal Fed debate is hardening, not softening.