Understanding the Economy's Influence on Mortgage Rates
If you’re considering buying or selling a home, you’re likely keeping a close eye on mortgage rates and wondering what the future holds.
One key factor influencing mortgage rates is the Federal Funds Rate, which determines the cost for banks to borrow money from one another. While the Federal Reserve (the Fed) doesn’t set mortgage rates directly, it does control the Federal Funds Rate.
This connection is why many are eagerly anticipating any changes the Fed might make to this rate. A decrease in the Federal Funds Rate typically puts downward pressure on mortgage rates. The Fed is set to meet next week, and their decision will hinge on three critical metrics:
The Rate of Inflation
Job Growth
The Unemployment Rate
Here’s the latest on these indicators:
The Rate of Inflation
You’ve probably noticed the impact of inflation over the past year or so, particularly in the rising costs of goods and services. The Fed aims to reduce inflation to around 2%. Although inflation is still above this target, it is gradually moving in the right direction (see graph below):
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 any action on the Federal Funds Rate. If fewer jobs are created, it means the economy is still strong but cooling a bit – which is their goal. That appears to be exactly 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’s an indicator 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. So, a low rate means a lot of Americans are employed. That’s a good thing 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 a consistently rising unemployment rate is something the Fed needs to see before deciding to cut the Federal Funds Rate. That’s because a higher unemployment rate would mean reduced spending, and that would help get inflation back under control.
What Does This Mean Moving Forward?
While mortgage rates are going to 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, it’s unlikely they’ll 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.”
Basically, 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 their September meeting.
Remember, the Fed doesn’t directly set mortgage rates. It’s just that whenever they decide to cut the Federal Funds Rate, mortgage rates should respond.
Of course, the timing of when the Fed takes action could change because of new economic reports, world events, and other factors. That’s why it’s usually not a good idea to try to time the market.
Bottom Line
Recent economic data may signal that hope is on the horizon for mortgage rates. Count on a local real estate agent you can trust to keep you up to date on the latest trends and what they mean for you.
Disclaimer: The information provided in this blog post is based on the latest available data at the time of writing, which is subject to change. It is intended for informational purposes only and should not be considered as financial or investment advice.