Why Labor Data Matters to Mortgage Rates and the Fed

Inflation and employment data provide insight into the general health of the economy, influencing whether Federal Reservewhose key tasks are curbing inflation and maximizing employment, adjusts interest rates upwards or downwards.

In the real world, low unemployment is a good thing: more people have jobs and the economy is stable. However, a “robust” labor market makes it less likely that the Fed will cut interest rates during 2025.

As the Fed began raising interest rates in early 2022 to tame inflation, mortgage rates have more than doubled. Although the central bank does not directly set mortgage rates, its monetary policy affects the cost of borrowing in the economy.

Many he hoped mortgage rates would soften falling to 6% after the Fed began cutting interest rates this fall. However, following the central bank’s 0.5% rate cut on September 18, a stronger-than-expected jobs report helped push mortgage rates back to nearly 7%.

Investors are waiting another 0.25% rate cut. at the Fed’s Dec. 17-18 policy meeting. However, the bigger question is how future economic data will affect the pace and extent of rate cuts next year.

“If the economy maintains, or even picks up strength, it will be much less likely that the Fed will want to keep cutting rates,” he said But WolffChief Economist at Zonda Company.

For potential home buyersthat means mortgage rates won’t fall below 6% for a while.

Read more: Weekly mortgage predictions

The relationship between economic data and mortgage rates

If you follow movements in mortgage ratesYou probably know that when the economy is doing great, mortgage rates tend to be more expensive.

Although a single data point is never decisive, when inflation is high, the Fed generally raises interest rates to discourage borrowing, stifle consumer spending and reduce the money supply. A tight labor market could also lead to higher inflation risks, putting more pressure on the Fed to raise rates.

The trick is not to slow demand so drastically that you cause a large increase in unemployment or a recession. Then, when unemployment is high, as during an economic crisis, the Fed often lowers interest rates to stimulate activity.

In essence, key indicators — the inflation rate and labor market growth — signal how the economy is performing. Those signals affect investors’ expectations and appetites, causing a chain reaction in the bond market. The first impact is in the value of government Treasuries, which affects other bond markets, such as mortgage bonds. Also called mortgage-backed securities, mortgage-backed bonds typically move in tandem with the 10-year Treasury.

When bond yields are high, the bond has less value in the market where investors buy and sell the securities, causing mortgage rates to rise. When yields are lower, bond values ​​go up and mortgage rates go down.

Weaker jobs data (ie, higher unemployment) tends to send bond yields lower, while stronger labor force readings push them higher.

TL;DR: Each monthly jobs report is one piece of economic data that affects bond investors, and the bond market and housing market are closely related.

How jobs data could affect mortgage rates in 2025

While it’s hard to predict what’s next for the housing market, one thing is certain: a strong economy and stable labor market make it harder for the Fed to cut interest rates, so mortgage rates it may not come as quickly as potential home buyers hope.

At its upcoming policy meeting in two weeks, the central bank will release its updated Summary of Economic Projections, which outlines where Fed officials expect interest rates to go in the future. The current versionlast updated in September, estimates four rate cuts in 2025. But given that The economic policy of the newly elected President Donald Trump Expected to fuel inflation again, many experts predict the next iteration will have fewer cuts.

Although unemployment has increased since last year (from 3.7% to 4.2%), the labor market is gradually cooling, and experts do not see the economy turning into a job loss recession at this time.

As for 2025, the labor market under a second Trump administration is a wild card, and changes in the labor force are likely to vary by industry.

Limitations of official labor data

Monthly reports from the Bureau of Labor Statistics include unemployment numbers, wage growth, job creation, productivity and more. While the headline numbers can give a broad picture of the economy, some experts say the nationally aggregated data does not accurately reflect which areas, populations and industries are adversely affected.

For example, the official unemployment rate is 4.2%, but that figure does not include those who have given up looking for work or those who can no longer work. However, this figure counts “underemployed” workers (those in part-time, contract or temporary jobs) as employees.

Read more: Unemployment statistics are misleading. Economic difficulties are much worse

Tips for Home Buyers

The direction of mortgage rates is not constant. Next month’s data could paint a different story about the labor market and inflation risks. If inflation continues to decline and the labor market slows, that could provide some room for mortgage rates to fall.

Although the economic factors that affect mortgage rates and home prices are out of your control, you can do things like build your credit score, pay off the debt and saving for a larger down payment to help you secure the best mortgage interest rate for your situation.