You’ve probably heard a lot of chatter about the Federal Reserve (the Fed) lately and how their actions might affect the housing market. If you’re thinking about buying or selling a home, you’re probably wondering how the Fed’s decisions could impact mortgage rates—and when we might see rates come down.

The Fed is meeting again this week to decide what to do with the Federal Funds Rate, which is the interest rate at which banks borrow from each other. While this rate isn’t directly tied to mortgage rates, it plays a key role in influencing them. So, if you’re following the market closely, you’re probably asking: what’s going to happen next?

Let’s break it down. The Fed’s decisions are based on three key economic indicators, and understanding them can help you anticipate what might happen with mortgage rates in the coming months.

1. The Direction of Inflation

By now, you’ve probably noticed that the cost of everyday goods and services has been higher than usual. That’s inflation—and the Fed is keeping a close eye on it. They want inflation to return to around 2%, which is considered a healthy rate for the economy.

Right now, inflation is still above that target, but the good news is that it’s been gradually coming down over the past two years. While there have been some ups and downs, inflation is holding relatively steady at the moment.

This steady improvement is a big reason why the Fed is expected to cut the Federal Funds Rate again this week. The goal is to make borrowing a bit cheaper while still ensuring the economy keeps growing.

2. Job Growth

The Fed is also paying close attention to the job market. They want to see job growth slow down a bit before they cut interest rates further. Why? Because a slowdown in job creation shows that the economy is still strong but not overheating.

And that’s exactly what’s happening right now. In fact, a recent government report showed that U.S. employers added fewer workers in October than in any month since December 2020. This suggests that the job market is cooling off after running hot for a while—just the kind of shift the Fed is hoping for. As Reuters reported:

“Any doubts the Federal Reserve will go ahead with an interest-rate cut… fell away on Friday after a government report showed U.S. employers added fewer workers in October than in any month since December 2020.”

3. The Unemployment Rate

The unemployment rate is another key factor the Fed is watching closely. A low unemployment rate means most people who want a job are able to find one—great for workers but potentially a bit of a problem for inflation. More people working means more spending, which can drive prices up.

Generally speaking, any unemployment rate below 5% is considered close to full employment, and right now, the rate is at 4.1%. That shows the labor market is still healthy, even though job growth is starting to slow.

So, What Does This Mean Going Forward?

The economy seems to be moving in the direction the Fed wants, which is why many experts predict they’ll cut the Federal Funds Rate by a quarter of a percentage point this week, according to the CME FedWatch Tool.

If that happens, it could set the stage for mortgage rates to come down as well. However, it’s important to remember that mortgage rates won’t fall immediately. While the Fed doesn’t directly control mortgage rates, their actions do influence them. Most forecasts suggest that mortgage rates will gradually ease over the next year, assuming inflation continues to stabilize and the Fed is able to keep cutting the Federal Funds Rate into 2025.

That said, any shift in the economic indicators we’ve discussed here could change the trajectory of the market—and in turn, the Fed’s actions. So, it’s safe to expect some volatility in the months ahead.

As Ralph McLaughlin, Senior Economist at Realtor.com, 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. While volatility has been the theme of mortgage rates over the past several months, we expect stability to reemerge towards the end of November and into early December.”

Bottom Line

While the Fed’s actions are an important factor, it’s ultimately the broader economic conditions and market trends that will drive mortgage rates. As we move through the rest of 2024 and into 2025, expect rates to stabilize or decline gradually. That means we should see more certainty in what has been a very volatile market.

If you’re planning to buy or sell a home, stay informed and keep an eye on the key indicators. With the right guidance and a good understanding of the market, you’ll be in a better position to make confident decisions moving forward.