Oil prices are now sitting around $70 per barrel this morning, a significant improvement from the recent highs and getting much closer to the pre-conflict levels near $56.

Mortgage rates have improved as well, but not nearly as fast as oil prices have fallen. The reason? The Federal Reserve remains cautious. While lower energy prices are certainly helpful, policymakers are still concerned about the inflationary impact from the past several months when oil prices were elevated. The Fed wants more evidence that inflation is sustainably moving lower before becoming less restrictive.

Housing data this morning reflected the impact of higher rates.

New Home Sales, which measure signed contracts on newly constructed homes, fell 7.3% in May. The West led the decline, down a substantial 27%, suggesting affordability challenges and elevated mortgage rates may be causing some buyers to pause.

Mortgage application activity remains relatively unchanged. Buyers continue to shop for homes, but many appear to be waiting for a clearer signal on the direction of interest rates before making a move.

The takeaway?

Lower oil prices are a positive development and should help the inflation story over time. However, the Fed is focused on where inflation is headed, not where oil prices are today. Until policymakers gain confidence that inflation is under control, rates may be slower to fall than many consumers expect.

For now, the market is balancing improving inflation prospects against a Fed that remains firmly focused on price stability.

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