War-driven energy costs and tariff pressure pushed the Fed's preferred inflation gauge to a three-year high, dimming hopes for rate relief
The Federal Reserve's preferred inflation measure climbed to its highest level in nearly three years in April, fresh Commerce Department data showed Thursday.
The reading all but ensures the central bank will keep borrowing costs on hold, reinforcing fears among mortgage brokers that rate relief may be pushed well into 2027.
The personal consumption expenditures (PCE) price index rose 0.4% for the month, lifting the 12-month rate to 3.8%, nearly double the Fed's 2% target.
Core PCE, which strips out food and energy and serves as the Fed's most closely watched policy tool, rose 0.2% for the month and 3.3% annually, according to the Bureau of Economic Analysis.
Monthly readings came in softer than the 0.5% and 0.3% estimates, respectively, offering a narrow sliver of encouragement that the sharpest price pressures may be beginning to ease.
But the broader picture remains troubling.
Gas prices surged 5.5% in April, goods prices climbed 0.7%, and housing costs posted their largest monthly gain in more than a year.
Americans' personal saving rate fell to 2.6%, its lowest since June 2022, as consumers tapped reserves to absorb higher prices even as disposable income declined 0.1% for the month.
Barry Habib, Founder and CEO of MBS Highway, says inflation tied to Middle East conflict driven energy spikes and past Federal Reserve policy decisions are limiting the potential for near term mortgage rate relief.https://t.co/y1hT5qkGnU
— Mortgage Professional America Magazine (@MPAMagazineUS) May 20, 2026
War and tariffs complicate the path forward
The Iran conflict has emerged as the central variable reshaping the Fed's calculations in 2026.
Soaring energy prices have pushed total PCE inflation to its highest levels in years, while core PCE continues to move higher in part because of president Donald Trump's tariffs on imported goods.
The Survey of Professional Forecasters, released by the Federal Reserve Bank of Philadelphia, now projects headline PCE to hit 4.5% in the second quarter, with core PCE at 3.4%, compared to prior estimates of 2.7%.
Markets are now pricing better than even odds of a Federal Reserve rate hike.
Samantha Shelton, mortgage broker and president of Align Lending, observed ahead of the April meeting that the Fed would be patient rather than hasty.
"The Fed has been very consistent in signaling that they'd rather be patient than move too quickly and risk undoing progress," Shelton said.
Read more: New Fed chair Warsh 'in a bit of a pickle' navigating current market, says senior economist
What it means for mortgage brokers
The average 30-year fixed mortgage rate jumped to 6.51% for the week ending May 21, according to Freddie Mac, lifting rates further from the five-handle many originators say is crucial to reviving purchase activity.
Nicholas Barta, division president at Security First Financial, told Mortgage Professional America that the prospect of rates returning to the fives this year now "probably isn't reasonable anymore."
Thursday's data also revealed that first-quarter GDP growth was revised down to an annualized rate of 1.6% from an initial estimate of 2%, reflecting weaker consumer spending and investment, a further complication for policymakers already navigating a divided Federal Open Market Committee.
Markets have priced in a 98% probability that the Fed will leave rates unchanged at its June 17 meeting, while futures markets have raised the probability of a rate hike by year-end to approximately 30%, according to CME Group data.
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