Unemployment Uptick May Pressure Fed To Cut Interest Rates Aggressively

In the wake of Friday's jobs report showing the labor market deteriorating unexpectedly sharply, the question on the minds of investors and economists is no longer whether the Federal Reserve will cut interest rates at its next meeting in September, but how steeply it will cut them.

The jump in the unemployment rate in July to its highest since 2021 could give the Fed motivation to cut its benchmark fed funds rate faster than previously expected. Several forecasters changed their predictions for the central bank's next moves, calling for three quarter-point rate cuts by the end of the year instead of two.

The Fed is now under pressure to respond to the weakening labor market because of its twofold mission to to keep inflation low and employment high. Recent reports have shown inflation falling towards the Fed's goal of a 2% annual rate from its post-pandemic surge, and with the threat of rising unemployment growing larger, the central bank may shift its focus towards preventing mass layoffs.

 

Markets Already Pricing in Lower Rates

 

At least for now, fed-watchers are betting that the days of high interest rates are numbered.

Just as the rate hikes pushed borrowing costs to their highest in decades, a lower fed funds rate is meant to ease some of that financial pressure, and could lead to lower borrowing costs for many kinds of loans.

For example, rate cuts could offer some relief to homebuyers who have been priced out of the market by high mortgage rates. The expectation of rate cuts, in and of itself, also helps push mortgage rates down.

“The market is moving ahead of the Fed, bringing down longer-term rates including those for mortgages, which should lead to both more home purchases and a pickup in refinance activity," Mike Fratantoni, chief economist at the Mortgage Bankers Association, wrote in a commentary.

The yield on 10-year Treasurys, which is closely tied to mortgages, fell to around 3.80% Friday, the lowest level since last December. You can read more here. 

We have already seen a drop in interest rates. In fact many of our buyers were able to float down their rate prior while in-contract but prior to close. We are obviously watching this very closely and will continue to keep you informed.