War, oil and inflation: What it means for rates

Inflation related to the Iran conflict caused the panel of economists surveyed by Wolters Kluwer to moderate their views on growth and short-term rate cuts.

The April survey for the Blue Chip Economic Indicators took place before the ceasefire announcement, let alone Friday morning's release of Consumer Price Index data.

The Bureau of Labor Statistics found the CPI rose 0.9% in March from February and 3.3% year-over-year; the latter is well above the Federal Reserve's 2% target.

When it comes to another index, the Personal Consumption Expenditures, the Fed's preferred metric, the BCEI panel expects the core measurement to increase 3.0% over the four quarters of this year because of energy-related inflation. This is versus 2.8% in the March BCEI survey.

For 2027, the panel predicts the core index to increase 2.4%, a touch faster than 2.3% in the March survey.

The respondents differ in their views of the duration of this bout of inflationary pressure. Slightly more than half, 56%, think the higher energy costs from the conflict are a limited and temporary pass-through to core inflation. However, 36% of them are anticipating it will be more of a moderate but persistent pass-through.

The panel may be a little bit more bullish than the markets regarding the short-term rates the Federal Open Market Committee controls.

"Although futures markets show an expectation of a steady federal funds rate over the balance of the year, the Blue Chip panel expects a cut of 25 basis points by the end of 2026," the commentary in the April report said. 

In the January BCEI survey, the panelists predicted 50 basis points of Fed rate cuts in 2026.

Could the Fed actual raise short-term rates next

The FOMC's next meeting is scheduled for April 28 and 29. None of the economists in the latest survey expect a rate reduction; the March survey had just 2% believing the next cut would come at this month's session.

Furthermore, the share which believed the next cut would come in June slipped to 11% from 60% in the March survey because of the conflict-related inflation.

Meanwhile, in the March survey, 36% said the next cut would take place later than June. In this month's panel, 9% specified that July's meeting would be when the next reduction takes place with 71% stating it would take place even later.

Furthermore, the percentage which believes the FOMC's next move will be a rate increase rose to 9% in April from 2% in March.

The mortgage industry's view of inflation and rates

The data showing the economy is slowing might have inspired hope of a Fed rate cut later this month, but this "doesn't really mean anything" amid the ripple effects of what is happening in the Middle East, said Melissa Cohn, regional vice president of William Raveis Mortgage, in a statement.

"Where oil goes is where mortgage rates and the rate of inflation will go," Cohn stated. "So, if this cease-fire actually holds, and they can resolve and end the war and oil prices settle back down, then rates will come back down."

The Freddie Mac Primary Mortgage Market Survey for April 9 had the 30-year fixed down by 9 basis points to 6.37% from the prior week.

The CPI data comes one week following a rather positive BLS employment report, noted Lisa Sturtevant, chief economist for Bright MLS.

While a strong labor market is generally positive, the combination of growing employment and rising inflation effectively removes the possibility of a Federal Reserve rate cut in the near term," Sturtevant said in a statement. 

Besides the rise in inflation, other data is showing consumer sentiment about the U.S. economy is slipping.

Still the spring housing market, once seen as promising, is now being buffeted in a "crosscurrent of conflicting signals," she said.

"Although inventory is rising seasonally, a tug-of-war has emerged between increased choice and decreased confidence," Sturtevant said. "Both buyers and sellers are acting with extreme caution, waiting for lower rates, more stable inflation and more certainty."

American families are reeling, with gas prices going up like a rocket but any future decline will be much slower, added Selma Hepp, chief economist at Cotality in a statement.

Agreeing with the BCEI panelists, "with geopolitical risks on shaky grounds, inflation is likely to stay firmer for longer, pushing rate cuts further into the back half of the year," Hepp said.