How the Economy Impacts Mortgage Rates

<article class="post-1133570 post type-post status-publish format-standard has-post-thumbnail hentry" id="post-1133570"><span class="entry-date">July 25, 2024</span><div class="entry-header center-block text-center"><h1 class="entry-title">How the Economy Impacts Mortgage Rates</h1><div class="shareBlock"><div class="shareTitle">Share</div><div class="shareIcons"><a aria-label="Twitter Share Link" class="twitter solid display-inline-block" data-tracking="Post,Social Post Link Clicked,Twitter" href="http://twitter.com/share?text=How+the+Economy+Impacts+Mortgage+Rates&amp;url=https%3A%2F%2Fgilliggroup.com%2Fblog%2Fhow-the-economy-impacts-mortgage-rates%2F" target="_blank"><span class="force-hidden">Twitter</span></a>
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</div></div><div class="post-tax post-category"><span></span><a href="../category/realtor-blog/index.html" rel="tag">Realtor Blog</a></div><div class="post-tax post-post_tag"></div></div><div class="entry-content"><div><img alt="How the Economy Impacts Mortgage Rates Simplifying The Market" decoding="async" loading="lazy" src="https://media.agentaprd.com/sites/222/20240725-How-the-Economy-Impacts-Mortgage-Rates-original.webp" style="display: block; margin-bottom: 5px; clear: both; max-width: 100%;" width=""/>
<p>As someone who’s thinking about <a href="https://www.simplifyingthemarket.com/2024/07/19/the-biggest-mistakes-homebuyers-are-making-right-now/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" target="_blank">buying</a> or <a href="https://www.simplifyingthemarket.com/2024/07/17/why-fixing-up-your-house-can-help-it-sell-faster/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" target="_blank">selling</a> a home, you’re probably paying close attention to mortgage rates – and wondering <a href="https://www.simplifyingthemarket.com/2024/06/28/housing-market-forecast-for-the-2nd-half-of-2024-infographic/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" target="_blank">what’s ahead</a>.</p>
<p>One thing that can affect mortgage rates is the Federal Funds Rate, which influences how much it costs banks to borrow money from each other. While the <em>Federal Reserve</em> (the Fed) doesn’t directly control mortgage rates, they do control the Federal Funds Rate.</p>
<p>The relationship between the two is why people have been watching closely to see when the Fed might lower the Federal Funds Rate. Whenever they do, that’ll put downward pressure on mortgage rates. The Fed meets next week, and three of the most important metrics they’ll look at as they make their decision are:</p>
<ol>
<li>The Rate of Inflation</li>
<li>How Many Jobs the Economy Is Adding</li>
<li>The Unemployment Rate</li>
</ol>
<p>Here’s the latest data on all three.</p>
<h4><strong>1. The Rate of Inflation</strong></h4>
<p>You’ve probably heard a lot about inflation over the past year or two – and you’ve likely felt it whenever you’ve gone to buy just about anything. That’s because high inflation means prices have been going up quickly.</p>
<p>The Fed has stated its goal is to get the rate of inflation back down to 2%. Right now, it’s still higher than that, but moving in the <a href="https://www.investing.com/economic-calendar/core-pce-price-index-905" rel="noopener noreferrer" target="_blank">right direction</a> (<em>see graph below</em>):</p>
<h4><strong><img decoding="async" src="https://files.keepingcurrentmatters.com/KeepingCurrentMatters/content/images/20240723/20240725-Inflation-Is-Trending-Toward-2-original.png"/>2. How Many Jobs the Economy Is Adding</strong></h4>
<p>The Fed is also watching how many new jobs are created each month. They want to see job growth slow down consistently before taking any action on the Federal Funds Rate. If fewer jobs are created, it means the economy is still strong but cooling a bit – which is their goal. That appears to be exactly what’s happening now. <em>Inman</em> <a href="https://www.inman.com/2024/07/05/mortgage-rates-retreating-from-7-on-massive-revision-to-jobs-report/" rel="noopener noreferrer" target="_blank">says</a>:</p>
<blockquote><p><em>“. . . 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.”</em></p></blockquote>
<p>So, while employers are still adding jobs, they’re not adding as many as before. That’s an indicator the economy is slowing down after being overheated for quite some time. This is an encouraging trend for the Fed to see.</p>
<h4><strong>3. The Unemployment Rate</strong></h4>
<p>The unemployment rate is the percentage of people who want to work but can’t find jobs. So, a low rate means a lot of Americans are employed. That’s a good thing for many people.</p>
<p>But it can also lead to higher inflation because more people working means more spending – which drives up prices. Right now, the <a href="https://www.bls.gov/news.release/empsit.nr0.htm" rel="noopener noreferrer" target="_blank">unemployment rate</a> is low, but it’s been rising slowly over the past few months (<em>see graph below</em>):</p>
<p><a href="https://files.keepingcurrentmatters.com/KeepingCurrentMatters/content/images/20240723/20240725-Unemployment-Rate-Reached-4-original.1-in-June" rel="noopener noreferrer" target="_blank"><img alt="No Caption Received" decoding="async" src="https://files.keepingcurrentmatters.com/KeepingCurrentMatters/content/images/20240723/20240725-Unemployment-Rate-Reached-4-original.1-in-June"/></a>It may seem harsh, but a consistently rising unemployment rate is something the Fed needs to see before deciding to cut the Federal Funds Rate. That’s because a higher unemployment rate would mean reduced spending, and that would help get inflation back under control.</p>
<h4><strong>What Does This Mean Moving Forward?</strong></h4>
<p>While mortgage rates are going to continue to be volatile in the days and months ahead, these are signs the economy is headed in the direction the Fed wants to see. But even with that, it’s unlikely they’ll cut the Federal Funds Rate when they meet next week. Jerome Powell, Chair of the Federal Reserve, <a href="https://www.cnbc.com/2024/07/02/powell-says-fed-has-made-quite-a-bit-of-progress-on-inflation-but-needs-more-confidence-before-cutting.html" rel="noopener noreferrer" target="_blank">recently said</a>:</p>
<blockquote><p><em>“We want to be more confident that inflation is moving sustainably down toward 2% before we start the process of reducing or loosening policy.”</em></p></blockquote>
<p>Basically, we’re seeing the first signs now, but they need more data and more time to feel confident that this is a consistent trend. Assuming that direction continues, according to the <em>CME FedWatch Tool</em>, experts say there’s a projected <a href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html" rel="noopener noreferrer" target="_blank">96.1%</a> chance the Fed will lower the Federal Funds Rate at their September meeting.</p>
<p>Remember, the Fed doesn’t directly set mortgage rates. It’s just that whenever they decide to cut the Federal Funds Rate, mortgage rates should respond.</p>
<p>Of course, the timing of when the Fed takes action could change because of new economic reports, world events, and other factors. That’s why it’s usually not a good idea to try to <a href="https://www.simplifyingthemarket.com/2024/06/26/focus-on-time-in-the-market-not-timing-the-market/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" target="_blank">time the market</a>.</p>
<h3>Bottom Line</h3>
<p>Recent economic data may signal that hope is on the horizon for mortgage rates. Count on a local <a href="https://www.simplifyingthemarket.com/2024/07/15/why-working-with-a-real-estate-professional-is-crucial-right-now/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" target="_blank">real estate agent</a> you can trust to keep you up to date on the <a href="https://www.simplifyingthemarket.com/2024/07/12/how-do-presidential-elections-impact-the-housing-market-infographic/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" target="_blank">latest trends</a> and what they mean for you.</p>
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