Biden, Harris Fail to Address Worrying Labor Market Signs
The Federal Reserve has started sounding alarm bells over obvious signs of weakness in the employment sector, stirring itself into action to potentially lower its benchmark interest rate, a move not seen in the last three-quarters of a year. A large portion of economists alongside market participants have come to anticipate a modest reduction of a quarter-point in the central bank’s overnight rate set for this Wednesday. Lending rates attached to mortgages have already started dipping, predicting the aforementioned move—last week seeing the average 30-year fixed rate sliding downwards to a level not seen in the past 11 months at 6.35%. While for those considering entering the housing market, this might seem like a positive development, it’s really a bit of a ruse.
Potential homebuyers who are still holding out, thinking this downward trend in mortgage rates will further escalate in the aftermath of the meeting might find themselves on the wrong end of the market. The reasoning behind this is largely due to the fact that financial markets have already calculated into their price three 25-basis-point reductions before concluding this fiscal year, and a triplet of similarly sized deductions by the end of 2026. What this is basically signaling is the heavily optimistic expectations of the market towards the forthcoming rate cuts—seeding the possibility of a significant market letdown in case of a slower execution speed.
If the determination process turns controversial and divided, marked by voting disagreements against the proposed cut, or should the future course-of-action hinted by the policymakers fail to match what has already been predicted by the market for any subsequent rate cuts, the reaction could potentially drive mortgage rates upwards. Something akin to this unfolding occurred back in September of 2024. In anticipation of prospective rate cuts, mortgage rates had drastically plummeted to a low unseen in two years but as it gradually became clear that proposed cuts wouldn’t be as aggressive as expected, rates rebounded and began their upward trajectory.
Although we have witnessed a decline in mortgage rates in recent weeks, they are yet to reach the early September 2024 level, which hovered near 6%—a time when the federal funds rate was an entire percentage point above its current standing. Following the meeting, it’s plausible that mortgage rates will maintain their current level or may even increase slightly as markets are anticipating a comparatively more relaxed monetary policy and could end up being let down by insufficient forward guidance. That being said, the role of the central bank in deciding mortgage rates isn’t direct—instead, these rates usually mirror the yields on long-term bonds.
These bond markets are swayed by investor beliefs regarding upcoming policy shifts and overall financial standing, inclusive of factors like inflation and the government deficits. Rising levels of inflation and mounting worry over increasing government debt could instigate an upward shift in mortgage rates – contradicting the current sustained monetary easing. The central bank’s long history of defending its autonomy from government influence or pressure has found itself being put to the test in recent times.
Official appointments and threats to the autonomy of the central bank have become more frequent and intense recently, posing a fresh political challenge to the bank’s governance. Just to briefly delve into how the bank conducts its affairs: in order to control inflation, the bank resorts to increasing rates, whereas, a dip in rates is used as a tactic to stimulate the employment sector. With the lingering shadow of inflation proving to be a persistent fear, the policy rate has remained at a steady 4.25% to 4.5% since the last December.
The late alarms from the labor market have finally shocked the system into action. The first damage was inflicted early in August just after they concluded the previous meeting, when a dramatic downward correction to the number of new jobs created in May and June was published by the Labor Department. Follow-up revisions only further highlighted the job market’s deteriorating performance – showing that the economy managed to add a mere average of 27,000 fresh jobs per month, a meager figure that starts from May and falls far short of the 100,000 new jobs per month that are critical in preventing unemployment rates from climbing.
Moreover, the country is experiencing a situation where the number of unemployed job-seekers eclipses available job openings for the first time since 2021. Coinciding with this, recently reported unemployment claims – often a good measure of lay-offs, reached their highest mark in four years last week. Given these circumstances, it seems fairly reasonable to advocate for rate cuts. However, even as rate cuts seem prudent in the face of labor market indicators, inflation has started creeping back in, and this signals an encompassing economic quagmire with August general inflation clocking an annual rate of 2.9%.