The Federal Reserve (Fed) has once again adjusted the Federal Funds Rate, lowering it by a quarter-point. While this rate isn’t the same as mortgage rates, it influences them indirectly. For those buying or selling a home, this sparks a crucial question: when will mortgage rates finally come down? To answer that, we need to examine the economic indicators driving the Fed’s decisions.

Inflation’s Path

Inflation continues to influence borrowing costs. The Fed’s goal is to bring inflation closer to its 2% target. Though inflation has eased significantly compared to its peak over the past two years, it remains slightly elevated. Encouragingly, the trend is moving in the right direction. The gradual decline in inflation signals that the economy is stabilizing, paving the way for potential further rate cuts.

Job Growth and Cooling Markets

Job creation is another key metric for the Fed. Slower job growth indicates that the labor market is cooling, which aligns with the Fed’s efforts to balance economic growth and inflation control. Recent reports show that fewer jobs are being added compared to previous months, suggesting that the market is responding as intended. While employers are still hiring, the pace has slowed, providing room for the Fed to ease rates further.

Low Unemployment’s Role

Unemployment remains at a low 4.1%, a sign of a strong labor market. While low unemployment benefits workers, it can also stoke inflation by increasing consumer spending. The Fed aims to maintain a balance, ensuring that the job market remains robust without fueling price hikes. The current unemployment rate reflects that delicate equilibrium, giving the Fed confidence to cut rates while maintaining stability.

What It Means for Mortgage Rates

The Fed’s recent rate cut could signal relief for mortgage rates, but changes won’t happen overnight. Mortgage rates depend on various factors, including inflation trends, labor market performance, and external events like elections or economic shocks. Experts forecast a gradual decline in rates through late 2024 and into 2025, assuming the economy continues on its current trajectory.

Economist Ralph McLaughlin explains:
“The trajectory of rates over the coming months will be largely dependent on three key factors: (1) the performance of the labor market, (2) the outcome of the presidential election, and (3) any possible reemergence of inflationary pressure.”

Bottom Line

While the Fed’s decisions influence mortgage rates, economic indicators like inflation, job growth, and unemployment play the leading role. If these factors continue to align with the Fed’s goals, expect mortgage rates to stabilize and decline gradually in the coming year. However, keep an eye on market shifts, as any unexpected changes could alter this outlook. For now, the housing market is inching closer to a more stable and predictable future.