Core consumer price inflation – measured without food and energy – came in at 1.9% on an annualized rate for October. The Federal Reserve's target is for 2% annual inflation. The latest numbers on inflation coupled with October's strong employment numbers point to a high probability the Fed will finally raise the federal funds rate next month. Traders in fed funds rate futures contracts are now pricing a 72% probability that a rate increase will occur in December.

Interestingly, interest rates in general and mortgage rates in particular have leveled off now that most everyone believes a rate hike is imminent. We're not surprised. Markets move in anticipation of an event, but once the event appears imminent, market activity tends to abate. Mortgage rates have certainly leveled off. Rate quotes have even drifted lower over the past few days.

Many market watchers believed rates would simply continue to rise until Fed officials convened onDec. 16. This is, no doubt, the primary reason mortgage application activity has accelerated in recent weeks. Better to lock in today before rates rise tomorrow. There is a flaw in the logic, though. When everyone anticipates rates will rise, rates have already risen. 

Of course, no one can be 100% sure. It's unlikely, though it's possible, that November employment numbers could meaningfully fall short of exceptions. Annualized gross domestic product growth, which posted at 1.5% for the third-quarter, could also be revised lower. If these events were to occur, you can be sure interest rates will fall. 

But if it becomes even more apparent the Fed will raise the fed funds rate, we don't think mortgage rates will move much higher, or higher at all. We would not be surprised to see rates drift lower the closer we get to Dec. 16. The more apparent an impending event becomes, the more likely markets are to move in the opposite direction.

Information provided by Jessica Regan.

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