Why employment data matters to mortgage rates and the Fed
Inflation and employment data provide insight into the overall health of the economy and influence whether the Federal Reserve, whose main duties are to curb inflation and maximize employment, adjusts interest rates up or down.
In the real world, low unemployment is a good thing: more people have jobs and the economy is stable. However, a “robust” labor market makes it less likely that the Fed will cut rates in 2025.
Since the Fed began raising rates in early 2022 to curb inflation, mortgage rates have more than doubled. Although the central bank does not directly set home loan rates, its monetary policy influences the cost of borrowing throughout the economy.
Many hoped mortgage rates would drop to 6% after the Fed began cutting rates this fall. However, following the central bank’s 0.5% rate cut on September 18, a stronger-than-expected jobs report pushed home loan rates back up to almost 7%.
Investors anticipate another rate reduction of 0.25% during the Fed’s Dec. 17-18 policy meeting. But the bigger question is how future economic data will influence the pace and extent of rate cuts next year.
“If the economy holds up or even picks up steam, the Fed will be much less likely to want to keep cutting rates,” he said. Ali Wolfchief economist at Zonda.
For potential home buyers, this means that mortgage interest rates will not fall below 6% for the time being.
Read more: Weekly mortgage forecasts
The relationship between economic data and mortgage interest rates
If you follow mortgage rate trends, you probably know that when the economy is doing well, mortgage rates tend to be more expensive.
While a single data point is never decisive, when inflation is high the Fed generally raises interest rates to discourage borrowing, suppress consumer spending and reduce the money supply. A tight labor market could also lead to greater inflation risk, putting more pressure on the Fed to raise rates.
The trick is not to slow demand so drastically that it causes a big rise in unemployment or a recession. Then, when unemployment is high, such as during an economic downturn, the Fed often cuts interest rates to stimulate activity.
Essentially, key indicators – the inflation rate and labor market growth – indicate how the economy is performing. These signals influence investors’ expectations and appetite and cause a chain reaction in the bond market. The first impact has to do with the value of government bonds, which affects other bond markets, such as mortgage bonds. Mortgage bonds, also called mortgage-backed securities, typically move in tandem with the 10-year Treasury bond.
When bond yields are high, the bond has less value in the market where investors buy and sell securities, causing mortgage rates to rise. When interest rates are lower, the value of the bond increases and the mortgage interest rate decreases.
Weaker employment data (i.e. higher unemployment) typically results in lower bond yields, while stronger labor market values push them higher.
TL;DR: Each monthly jobs report is one piece of economic data that impacts bond investors, and the bond market and the housing market are closely linked.
How jobs data could impact mortgage rates in 2025
While it’s challenging to predict what’s next in the housing market, one thing is certain: a strong economy and a stable labor market make it difficult for the Fed to cut rates, so mortgage rates may not fall as quickly as potential home buyers. hoping.
At its upcoming policy meeting in two weeks, the central bank will release its updated Summary of Economic Projections, which will outline where Fed officials expect interest rates to go in the future. The current versionlast updated in September, estimates four rate cuts in 2025. But given that new President Donald Trump’s economic policies are expected to stoke inflation, many experts predict there will be fewer cuts in the next iteration.
Even though unemployment has risen since last year (from 3.7% to 4.2%), the labor market is gradually cooling and experts do not expect the economy to enter a recession with job losses at this time.
As for 2025, the labor market under the second Trump administration is a wild card, and shifts in the workforce will likely vary by industry.
The limitations of official employment data
Monthly jobs reports from the Bureau of Labor Statistics include unemployment rates, wage growth, vacancies, productivity and more. While the headline numbers can paint a broad picture of the economy, some experts say nationally aggregated data does not accurately reflect which areas, populations and industries are more negatively affected.
For example, the official unemployment rate is 4.2%, but that figure does not include those who have given up looking for work or those who can no longer work. However, the figure counts underemployed workers (part-time, contract or temporary workers) as employees.
Read more: Unemployment statistics are misleading. Economic hardship is much worse
Advice for home buyers
The direction of mortgage rates is not permanent. Next month’s data could paint a different story about the labor market and inflation risks. If inflation continues to decline and the job market slows, there may be some room for mortgage rates to decline.
While you can’t control the economic factors that affect mortgage rates and home prices, you can do things like build your credit score, pay off debt, and save for a larger down payment to help you get the best mortgage rate for your situation.
