As someone thinking about buying or selling a home, you’re probably paying close attention to mortgage rates – and wondering what’s ahead.

One thing that can affect mortgage rates is the Federal Funds Rate, which influences how much it costs banks to borrow money from each other. While the Federal Reserve (the Fed) doesn’t directly control mortgage rates, they control the Federal Funds Rate.

The relationship between the two is why people have been watching closely to see when the Fed might lower the Federal Funds Rate. Whenever they do, that’ll put downward pressure on mortgage rates. The Fed meets next week, and three of the most important metrics they’ll look at as they make their decision are:

The Rate of Inflation
How Many Jobs the Economy Is Adding
The Unemployment Rate

Here’s the latest data on all three.

1. The Rate of Inflation

You’ve probably heard a lot about inflation over the past year or two – and you’ve likely felt it whenever you’ve gone to buy just about anything. That’s because high inflation means prices have been going up quickly.

The Fed has stated its goal is to reduce the inflation rate to 2%. Right now, it’s still higher than that, but moving in the right direction (see graph below):
Inflation is trending toward 2% - KM Realty Group LLC, Chicago

2. How Many Jobs the Economy Is Adding

The Fed is also watching how many new jobs are created each month. They want to see job growth slow down consistently before taking action on the Federal Funds Rate. If fewer jobs are created, the economy will still be strong but cooling – their goal. That appears to be precisely what’s happening now.

Inman says:

“. . . the Bureau of Labor Statistics reported that employers added fewer jobs in April and May than previously thought and that hiring by private companies was sluggish in June.”

So, while employers are still adding jobs, they’re not adding as many as before. That indicates the economy is slowing down after being overheated for quite some time. This is an encouraging trend for the Fed to see.

3. The Unemployment Rate

The unemployment rate is the percentage of people who want to work but can’t find jobs. A low rate means many Americans are employed, which is good news for many people.

But it can also lead to higher inflation because more people working means more spending – which drives up prices. Right now, the unemployment rate is low, but it’s been rising slowly over the past few months (see graph below):

It may seem harsh, but the Fed needs to see a consistently rising unemployment rate before deciding to cut the Federal Funds Rate. A higher unemployment rate would mean reduced spending, which would help get inflation back under control.

What Does This Mean Moving Forward?

While mortgage rates will continue to be volatile in the days and months ahead, these are signs the economy is headed in the direction the Fed wants to see. But even with that, they’ll unlikely cut the Federal Funds Rate when they meet next week. Jerome Powell, Chair of the Federal Reserve, recently said:

“We want to be more confident that inflation is moving sustainably down toward 2% before we start the process of reducing or loosening policy.”

We’re seeing the first signs now, but they need more data and more time to feel confident that this is a consistent trend. Assuming that direction continues, according to the CME FedWatch Tool, experts say there’s a projected 96.1% chance the Fed will lower the Federal Funds Rate at its September meeting.

Remember, the Fed doesn’t directly set mortgage rates. Whenever they decide to cut the Federal Funds Rate, mortgage rates should respond.

Of course, the timing of the Fed’s action could change due to new economic reports, world events, and other factors. That’s why trying to time the market is usually not a good idea.

Bottom Line

Recent economic data may signal that hope is on the horizon for mortgage rates. Let’s connect so you have an expert to keep you updated on the latest trends and what they mean for you.

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