You may be hearing a lot of talk about the Federal Reserve and how their actions will impact the housing market right now. Here’s why…
The Fed meets again this week to decide the next step with the Federal Funds Rate. That’s how much it costs banks to borrow from each other. Now, that’s not the same thing as setting mortgage rates. However, mortgage rates can be influenced through this process. And if you are thinking about buying or selling a home, you may be wondering about the downstream impact and when mortgage rates will come down.
Here’s a quick rundown of what you need to know to help you anticipate what will happen next. The Fed’s decisions are guided by these three key economic indicators:
- The Direction of Inflation
- How Many Jobs the Economy is Adding
- The Unemployment Rate
Let’s take a look at each one.
1. The Direction of Inflation
You’ve likely noticed prices for everyday goods and services seem to be higher each time you make a purchase at the store. That’s because of inflation. The Fed wants to see that number come back down so it’s closer to their 2% target.
Right now, it’s still higher than that. But despite a little volatility, inflation has generally been moving in the right direction. It gradually came down over the past two years and is holding fairly steady right now.
The path of inflation is a big part of the reason why the Fed will likely lower the Fed Funds Rate again this week to make borrowing less expensive, while still ensuring the economy continues to grow.
2. How Many Jobs the Economy Is Adding
The Fed is also keeping an eye on how many new jobs are added to the economy each month. They want job growth to slow down a bit before they cut the Federal Funds Rate further. When fewer jobs are created, it shows the economy is still doing well but gradually cooling off. That’s exactly what they are aiming for. And that’s what is happening right now.
Employers are still hiring, but just not as many positions right now. This shows the job market is starting to slow down after running hot for a while. That’s what the Fed wants to see.
3. The Unemployment Rate
The unemployment rate shows the percentage of people who want jobs but can’t find them. A low unemployment rate means most people are working. However, it can push inflation higher because more people working means more spending – and that makes prices go up.
Many economists consider any unemployment rate below 5% to be as close to full employment as is realistically possible. In the most recent report, unemployment is sitting at 4.1%.
Unemployment this low shows the labor market is still strong even as fewer jobs were added to the economy. That’s the balance the Fed is looking for.
What Does This Mean Going Forward?
Overall, the economy is headed in the direction the Fed wants to see. That’s why experts say they will likely cut the Federal Funds Rate by a quarter of a percentage point this week.
If that expectation ends up being correct, that could pave the way for mortgage rates to come down too. But that doesn’t mean they will fall immediately. It will take some time. Remember, the Fed doesn’t determine mortgage rates. Forecasts show mortgage rates will ease more gradually over the course of the next year. That’s assuming these economic indicators continue to move in the right direction and the Fed can contnue their Federal Funds rate cuts through 2025.
A change in any one of the factors mentioned here could cause a shift in the market and in the Fed’s actions. So, brace for some volatility and for mortgage rates to respond along the way.