Understanding Mortgage Rates and the Federal Funds Rate
As someone considering buying or selling a home, you’re likely paying close attention to mortgage rates and wondering what the future holds. One key factor that influences mortgage rates is the Federal Funds Rate, which determines how much it costs banks to borrow money from each other. Although the Federal Reserve (the Fed) doesn’t directly control mortgage rates, their management of the Federal Funds Rate has a significant impact.
The relationship between the Federal Funds Rate and mortgage rates is why many are closely watching to see if the Fed will lower this rate. A reduction would put downward pressure on mortgage rates. The Fed meets next week, and three critical metrics they will evaluate are:
- The Rate of Inflation
- Job Creation in the Economy
- The Unemployment Rate
Let’s take a closer look at these factors.
1. The Rate of Inflation
Inflation has been a hot topic over the past couple of years, and you've probably noticed rising prices on many goods and services. The Fed aims to reduce inflation to around 2%. Although inflation remains above this target, it is moving in the right direction.
2. Job Creation in the Economy
The Fed monitors job creation closely. They aim for job growth to slow down to prevent the economy from overheating. Recent data indicates that while employers are still adding jobs, the rate of job creation is slowing. According to Inman:
"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."
This trend suggests the economy is cooling, which aligns with the Fed's goals.
3. The Unemployment Rate
The unemployment rate, which measures the percentage of people actively seeking but unable to find work, is another critical indicator. While a low unemployment rate is generally positive, it can also contribute to higher inflation due to increased spending. Currently, the unemployment rate is low but has been rising gradually over the past few months.
A rising unemployment rate could help reduce inflation by decreasing overall spending, which the Fed needs to see before cutting the Federal Funds Rate.
What Does This Mean Moving Forward?
Mortgage rates are expected to remain volatile in the near future. The current economic indicators suggest the economy is moving in the direction the Fed desires. However, it is unlikely the Fed will cut the Federal Funds Rate in their upcoming meeting. Jerome Powell, Chair of the Federal Reserve, recently stated:
"We want to be more confident that inflation is moving sustainably down toward 2% before we start the process of reducing or loosening policy."
While we are seeing positive signs, the Fed requires more data and time to confirm this trend. According to the CME FedWatch Tool, there is a projected 96.1% chance the Fed will lower the Federal Funds Rate at their September meeting.
Recent economic data offers hope for lower mortgage rates in the future. To stay informed on the latest trends and what they mean for you, rely on a trusted local real estate agent. For more information, you can visit these resources:
Stay updated and make informed decisions as you navigate the housing market.
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