Understanding how the economy influences mortgage rates is crucial for anyone looking to buy a home. The relationship between these two factors is the reason why many people are closely watching the Federal Reserve’s (the Fed) decisions on the Federal Funds Rate. When the Fed lowers this rate, it tends to put downward pressure on mortgage rates, making it cheaper to borrow money for home purchases.
The Fed is set to meet next week, and their decision will be influenced by three key metrics:
1. The Rate of Inflation
The Fed has been clear about its objective to bring the rate of inflation down to 2%. Although the current rate is still above this target, it’s trending in the right direction. This gradual decrease in inflation is a positive sign, but the Fed needs to be certain that this trend will continue before lowering the Federal Funds Rate.
2. How Many Jobs the Economy Is Adding
Another critical metric the Fed monitors is job creation. They aim to see a steady slowdown in the number of new jobs being created each month before taking any action on the Federal Funds Rate. A slower rate of job growth indicates that the economy is strong but cooling down slightly, which aligns with the Fed’s goals. According to Inman, this appears to be happening now, with job growth slowing to a more manageable pace.
“. . . 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.”
3. The Unemployment Rate
Lastly, the Fed looks at the unemployment rate. While a low unemployment rate is generally positive, it can also lead to higher inflation as more people working means more spending, which drives up prices. Currently, the unemployment rate is low, but it has been slowly rising over the past few months. This increase suggests that the labor market is beginning to cool, which is another indicator the Fed will consider.
Based on these metrics, we are seeing the early signs of the trends the Fed wants to confirm before making any changes. As per the CME FedWatch Tool, experts estimate a 96.1% chance that the Fed will lower the Federal Funds Rate at their September meeting if these trends continue.
In summary, the Fed’s analysis of inflation, job creation, and the unemployment rate will significantly impact their decision on the Federal Funds Rate. Their actions, in turn, influence mortgage rates. By understanding these economic indicators, potential homebuyers can better anticipate changes in borrowing costs and make informed decisions.
Keeping an eye on these metrics can provide valuable insights into the future direction of mortgage rates, helping you decide the best time to buy or refinance a home.