Fed Gets Green Light for Interest Rate Cuts as Unemployment Rate Jumps to 4-Year High

The Federal Reserve is now seen as likely to cut interest rates multiple times before the end of the year, following another weak jobs report that showed unemployment jumping to a four-year high.

The U.S. economy added just 22,000 jobs in August, less than economists had expected, the Bureau of Labor Statistics reported Friday.

The unemployment rate rose to 4.3%, up slightly from 4.2% in July but hitting the highest level seen since October 2021, when the economy was still recovering from pandemic-driven layoffs.

Although the new jobs report was troubling news for the economy, for prospective homebuyers with secure jobs it likely means further easing in mortgage rates in the days to come.

Mortgage rates hinge primarily on the yields of 10-year Treasury notes, which plunged Friday to their lowest level since early April, when President Donald Trump's Liberation Day tariff announcement sparked panic in financial markets.

It signals further easing for mortgage rates is likely in the coming days, after the average 30-year mortgage rate fell to an 11-month low of 6.5% this week.

"For prospective home buyers and sellers, the federal funds rate is probably not the most important thing to watch," says BrightMLS Chief Economist Lisa Sturtevant. "There is a loose and time-lagged relationship between the federal funds rate and mortgage rates. Instead, it will be important to watch how the bond market responds to today’s jobs report and upcoming economic data releases."

One wild card in the equation is August inflation data due out next week. Headline inflation has been stuck around 2.7% through the summer, and if it continues to creep up, it could complicate matters for Fed policymakers.

Although a quarter-point cut to the Fed's policy rate had been viewed as likely at the next Federal Open Market Committee meeting on Sept. 17, the weakness of the August jobs report raised speculation of a larger half-point cut.

Bond markets also signaled higher confidence that the Fed will cut rates three times before the end of the year, estimating the probability of three cuts at 67% following the jobs report, according to the CME Group's FedWatch tool.

Further downward revisions raise concerns

The August jobs report was hotly anticipated following a stunning downward revision in the July report released one month ago.

The July report revised employment growth for May and June downward by a massive combined 258,000 jobs, revealing that spring hiring was much weaker than initially reported by the federal government.

Such a large revision signals that the economy is shifting rapidly, and that the assumptions built into initial estimates are faulty. Trump responded to the July report by firing the commissioner of the Bureau of Labor Statistics, whom he accused of manipulating the jobs numbers "for political purposes."

But the August report continued to offer troubling revisions, with June hiring revised downward by 27,000, from +14,000 to -13,000, meaning the employed population actually shrank that month for the first time since 2020.

Job growth in June was initially estimated at +147,000, a strong number that gave the Fed ample reason to hold rates steady at its late-July meeting.

July hiring was revised up by 6,000, from +73,000 to +79,000. With these revisions, employment in June and July combined was 21,000 lower than previously reported.

Mixed signals for housing market

While the cooling labor market will help nudge mortgage rates downward, it will also raise uncertainty for homebuyers who may fear losing their jobs.

It's unclear what the net effect might be on a housing market that is in a deep stall, with home sales this year on track to set another 30-year record low.

"Home sales activity and the housing market generally remain stuck as a formerly red-hot sellers’ housing market has balanced," says Realtor.com® Chief Economist Danielle Hale. "Homebuyers grapple with a lack of affordability, sellers contend with more competition, and builders deal with lower buyer demand."

Hale notes that in addition to falling mortgage rates and softening home prices, ongoing wage growth is the third key to restoring homebuyer affordability.

Although the new jobs report will put downward pressure on mortgage rates, concerns about inflation and rising government debt could push those rates back up, even if the Fed follows through with multiple rate cuts by year's end.

"Participants in the housing market should not try to time rates. They certainly should not expect the Fed’s decision itself to materially impact mortgage rates in the short-term," warns Sturtevant.

"People who want to buy and are financially ready to do so should take advantage of more inventory and more opportunities for negotiating," she adds. "Sellers in most markets are starting to reset expectations on pricing and are prepared to negotiate in a way they have not over the past few years.”