Today’s jobs report (full report here) showed unemployment at higher-than-expected levels. However, inflation remains above the target rate.

Currently, the Federal Reserve faces a challenging environment. Inflation remains above the target rate, but maintaining the overnight rates at restrictive levels for too long could harm the economy. Today's monthly unemployment report underscores this difficulty. Nonfarm payrolls increased by only 114,000, falling short of the estimated 175,000. Additionally, the unemployment rate rose to 4.3%, higher than the expected 4.1%. This weaker-than-expected employment report has sparked strong concerns that the Federal Reserve is waiting too long to ease, risking a harder-than-anticipated economic landing. As a result, Treasury yields have dropped by 15-18 basis points today, while equities are down 2.5%. On the mortgage side, lower note rates are participating much more in the rally than higher note rates, as expected.

The Fed acknowledges that the level of their overnight rate is restrictive to the economy and will need to be lowered at some point. Today’s jobs report indicates that they may need to do it sooner rather than later or risk a recession.

Thinking specifically of how this can impact mortgage rates: financial markets often price in the expectation of Fed rate cuts, so just because the Fed lowers rates doesn’t mean mortgage rates will move accordingly. It may already be priced in. But in general, if the Fed Funds Rate is lower mortgage rates are lower.

Here’s a little more information for anyone wanting to understand some of these economic markers, the Fed’s role and its influence on mortgage rates. The Federal Reserve has a dual mandate as it reviews the level of the overnight Federal Funds Rate: to maintain price stability (targeting a 2% inflation rate) and to maximize sustainable employment. The overnight Fed Funds Rate is the rate at which banks lend and borrow their excess reserves to each other. This rate not only influences lending activity, but also serves as a foundational element for longer-term interest rates. So while the Federal Reserve does not directly set mortgage rates, its policies significantly impact them.