The Federal Reserve (commonly referred to as the Fed) has been in the spotlight recently, and you may be wondering how their actions will impact the housing market. As the Fed meets this week to determine the next steps for the Federal Funds Rate, here’s what you should know and what to watch for.
While the Fed doesn’t set mortgage rates directly, their decisions can influence them. If you’re planning to buy or sell a home, understanding these dynamics is key to anticipating how mortgage rates may move in the coming months. Here’s a breakdown of the economic factors the Fed will consider:
1. Inflation Trends
You’ve probably noticed that the cost of everyday goods has increased. This is due to inflation, which the Fed aims to keep around 2%. While inflation is still above that target, it has been gradually moving in the right direction. This trend could encourage the Fed to lower the Federal Funds Rate, making borrowing cheaper and supporting continued economic growth.
2. Job Growth
The Fed also monitors job creation. They’re aiming for slower job growth, which signals a healthy economy that’s cooling slightly. Recently, fewer jobs have been added, the lowest since December 2020, showing the labor market is starting to ease. This moderation is a good sign that the Fed may consider further rate cuts.
3. Unemployment Rate
The unemployment rate currently sits at 4.1%, well below the 5% threshold many economists consider close to full employment. A low unemployment rate means more people are working, but it can also drive up inflation as increased employment leads to more spending. The Fed is seeking a balance here, with fewer job additions and steady unemployment signaling a well-managed economy.
What’s Next?
With the economy trending in the Fed’s preferred direction, experts predict they will lower the Federal Funds Rate by 0.25% this week. This could open the door for mortgage rates to gradually decrease, though it may take time for this effect to materialize. Keep in mind that while the Fed influences mortgage rates, they don’t control them directly. We’re likely to see a gradual decline in rates over the next year as long as inflation continues to fall and the labor market maintains its current pace.
However, any change in inflation, employment, or other factors could alter the Fed’s course, so some market volatility is expected in the coming months. As Ralph McLaughlin, Senior Economist at Realtor.com, explains:
“The trajectory of rates in the months ahead will largely depend on the labor market’s performance, the outcome of the presidential election, and potential inflationary pressures. While volatility has been the theme recently, we expect stability to return toward the end of November and early December.”
The Fed’s actions play a role in shaping mortgage rates, but broader economic conditions ultimately drive them. As we progress through 2024 and 2025, expect rates to stabilize or gradually decline, bringing more certainty to what has been a volatile housing market.
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