You might be hearing a lot about the Federal Reserve and how its decisions could affect the housing market right now. Here’s the reason behind it.

The Fed is having another meeting this week to discuss the next move regarding the Federal Funds Rate, which is the interest rate banks pay to borrow from one another. While this rate doesn't directly set mortgage rates, it can impact them. If you're considering buying or selling a home, you might be curious about how this could affect mortgage rates and when they might decrease.

Here’s a brief overview of what you should keep in mind to better understand what’s coming next. The Fed's decisions are influenced by three main economic indicators:

1. Let's talk about where inflation is heading.

2. How many jobs is the economy creating?

3. The rate of unemployment

1. Let's talk about where inflation is heading.

You've probably seen that the prices of everyday items and services keep going up whenever you shop. This is due to inflation, and the Federal Reserve is aiming to reduce this number to get it closer to their 2% target.

Inflation is still higher than it ideally should be. However, despite some fluctuations, it has been trending in a positive direction overall. It has gradually decreased over the past two years and is currently remaining relatively stable.

Inflation rates are still below where they want them to be, which is one of the main reasons the Fed is expected to cut the Fed Funds Rate again this week. This move aims to make borrowing cheaper and support ongoing economic growth.

2. How many jobs is the economy creating?

The Fed is monitoring the number of new jobs added to the economy each month. They prefer to see job growth slow down a little before lowering the Federal Funds Rate further. When job creation decreases, it indicates that the economy is performing well but is gradually cooling off, which is their goal. That’s the current situation. According to Reuters,

““Any doubts the Federal Reserve will go ahead with an interest-rate cut . . . fell away on Friday after a government report showed U.S. employers added fewer workers in October than in any month since December 2020.”
”

— Reuters

Employers are still bringing people on board, but there aren't as many job openings at the moment. This indicates that the job market is beginning to cool off after being extremely active for some time, which aligns with what the Federal Reserve hopes to see.

3. The rate of unemployment

The unemployment rate indicates the portion of individuals seeking jobs but unable to secure one. When this rate is low, it suggests that a majority of people are employed, which is a positive sign. However, this can lead to higher inflation since more people earning a paycheck typically means increased spending, ultimately driving prices up.

Many economists believe that an unemployment rate under 5% is pretty much the best we can aim for in terms of full employment. According to the latest report, the current unemployment rate is at 4.1%.

Having such low unemployment indicates that the labor market remains robust, even though the economy added fewer jobs recently. This is the equilibrium the Federal Reserve aims to achieve.

What Does This Mean Going Forward?

The economy seems to be moving in the direction the Fed is aiming for, which is why experts believe they will probably reduce the Federal Funds Rate by a quarter of a percentage point this week, based on the CME FedWatch Tool.

If that expectation proves to be accurate, it might lead to lower mortgage rates down the line. However, we shouldn't expect them to drop right away; it's going to take some time. It's important to keep in mind that the Fed doesn't set mortgage rates directly. Current forecasts suggest that mortgage rates will decrease more gradually throughout the next year, provided that the economic indicators keep improving and the Fed can maintain their rate cuts through 2025.

Any changes in the factors we've discussed could lead to shifts in the market and influence the Federal Reserve's actions in the coming days and months. Be prepared for some volatility, as mortgage rates are likely to fluctuate during this period. As Ralph McLaughlin, Senior Economist at Realtor.com, points out:

““The trajectory of rates over the coming months will be largely dependent on three key factors: (1) the performance of the labor market, (2) the outcome of the presidential election, and (3) any possible reemergence of inflationary pressure. While volatility has been the theme of mortgage rates over the past several months, we expect stability to reemerge towards the end of November and into early December.”
”

— Ralph McLaughlin, Senior Economist at Realtor.com

Bottom Line

The Federal Reserve does have an influence, but it's really the economic data and market conditions that mainly determine mortgage rates. As we progress through 2024 and into 2025, we can anticipate rates to either stabilize or slowly decrease, which should provide some much-needed certainty in what has been a turbulent market.