If you are considering purchasing or selling a home, you are likely monitoring mortgage rates closely and curious about future trends.

The Federal Funds Rate, which impacts banks' borrowing costs, can influence mortgage rates. Even though the Federal Reserve (the Fed) doesn't set mortgage rates directly, its control over the Federal Funds Rate can have an indirect effect.

The connection between the two is the reason why folks are keeping a close eye to figure out when the Fed could potentially decrease the Federal Funds Rate. If they do, that will push down mortgage rates. The Fed is set to meet next week, and three key indicators they will consider in shaping their decision are:

1. The current inflation rate.

2. The number of jobs being added to the economy is what I will address here.

3. The current unemployment rate indicates the percentage of people actively seeking job opportunities but unable to find work. It serves as a key indicator of the overall health of the economy.

Here’s the latest data on all three.

1. The Rate of Inflation

You've likely heard quite a bit about inflation in the last year or so – and you've probably felt its impact whenever making a purchase. High inflation leads to rapidly rising prices.

The Federal Reserve aims to lower the current inflation rate, which is above 2%, back to the target level. While inflation remains elevated, it is showing signs of heading in the desired direction. Please refer to the graph below for a visual representation.

2. How Many Jobs the Economy Is Adding

The Federal Reserve is also keeping a close eye on the monthly job creation numbers. They are looking for a consistent slowdown in job growth before considering any changes to the Federal Funds Rate. A decrease in the number of new jobs indicates that the economy is still robust but gradually moderating – aligning with their objectives. This seems to be the current scenario, as highlighted by Inman.

““. . . 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.”
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— Inman

Employers are continuing to hire, but not at the same pace as before. This suggests that the economy is gradually cooling off after a period of being excessively hot. Such a trend would likely be viewed positively by the Federal Reserve.

3. The Unemployment Rate

The unemployment rate indicates the percentage of individuals seeking work but are unable to secure jobs. Therefore, a low rate signifies that many Americans are currently employed, which is beneficial for numerous individuals.

Increased employment not only boosts economic activity but can also result in heightened inflation since more people working translates to increased spending, ultimately leading to price hikes. Presently, the unemployment rate is at a low level, although it has been seeing a gradual increase over the recent months, as illustrated in the graph below:

It may seem strict, but the Fed has to observe a continual increase in the unemployment rate before opting to lower the Federal Funds Rate. This is because a higher unemployment rate signifies decreased spending, which would aid in bringing inflation back to a manageable level.

What Does This Mean Moving Forward?

While mortgage rates are expected to remain unpredictable in the coming days and months, there are indications that the economy is progressing in line with the Federal Reserve's objectives. Despite these positive signals, it is improbable that there will be a reduction in the Federal Funds Rate during the upcoming meeting next week. Jerome Powell, the Chair of the Federal Reserve, stated recently:

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

The initial indicators are appearing now, but further data and time are necessary to confirm if this trend is steady. If this pattern persists, experts predict a 96.1% likelihood that the Fed will decrease the Federal Funds Rate during their September meeting, as per the CME FedWatch Tool.

The Federal Reserve doesn't directly determine mortgage rates. But when they choose to decrease the Federal Funds Rate, mortgage rates are expected to adjust accordingly.

It's worth noting that the timing of when the Fed takes action may vary due to new economic reports, world events, and various other factors. That's why attempting to predict the market timing is generally not advisable.

Bottom Line

Recent economic data suggests that there may be positive news ahead regarding mortgage rates. Contact us for expert insights to stay informed about the newest trends and how they can impact you.