Mortgage rates were headed down Friday after Federal Reserve Chair Jerome Powell said the central bank is starting to see unemployment as a bigger risk to the U.S. economy than inflation.
In his final address at an annual economic symposium in Jackson Hole, Wyoming, Powell said while the labor market remains near “maximum employment” and inflation has come down “a great deal from its post-pandemic highs,” the “balance of risks appears to be shifting.”
The labor market is in a “curious kind of balance” due to a “marked slowing in both the supply of and demand for workers,” Powell said. “This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”
Bond markets took Powell’s comments as an indication that the Fed will cut short-term interest rates on Sept. 17, although the outlook for additional cuts in October and December remains less certain.
Yields on 10-year Treasury notes, which often predict where mortgage rates are headed next, fell by nine basis points after Powell’s speech. A basis point is one hundredth of a percentage point.
Lender data tracked by Mortgage News Daily showed rates on 30-year fixed-rate mortgages down 10 basis points Friday — the first downward move since Aug. 13.
The CME FedWatch tool, which tracks futures markets to predict future Fed moves, showed investors on Friday put the odds of a Sept. 17 rate cut at 87 percent, up from 75 percent on Thursday.
Futures market investors on Friday were pricing in only a 37 percent chance that the Fed cuts rates three times this year, up from 25 percent on Friday.
Sam Williamson
“Although inflation remains above the Fed’s 2 percent target, Powell’s remarks suggest the shift toward easing is primarily a precautionary move — aimed at balancing risks — rather than a reaction to immediate economic weakness,” First American Senior Economist Sam Williamson said in a statement.
“The Fed now appears focused on recalibrating policy toward a more neutral stance, with any future cuts likely to be gradual and data-dependent,” Williamson said. “For the housing sector, even modest rate relief could improve affordability, revive buyer interest, and offer a much-needed boost to builders and lenders heading into the fall.”
After hitting a third-quarter low on Aug. 13 in the wake of a surprisingly weak jobs report, mortgage rates had been inching back up as investors and economists grapple with uncertainty over whether tariffs will rekindle inflation.
Mortgage rates in flux
The Aug. 1 jobs report showed payroll growth slowing to 35,000 jobs a month over the last three months, down from 168,000 a month last year. But several Federal Reserve governors tracked by Reuters have voiced “hawkish” worries about inflation since then.
At 6.63 percent on Thursday, rates on 30-year fixed-rate conforming loans were up eight basis points from their Q3 low of 6.55 percent, according to rate lock data tracked by Optimal Blue.
Rates have come down considerably from their 2025 high of 7.05 percent on Jan. 14, but “liberation day” tariff worries sent mortgage rates back up after they’d touched a low for the year of 6.48 percent on April 4.
It’s not just tariffs but the Trump administration’s changes in immigration, tax, spending and regulatory policies that make it difficult to assess where the economy is headed, Powell said.
Powell’s Jackson Hole speech
“Significantly higher tariffs across our trading partners are remaking the global trading system,” Powell said. “Tighter immigration policy has led to an abrupt slowdown in labor force growth. Over the longer run, changes in tax, spending, and regulatory policies may also have important implications for economic growth and productivity. There is significant uncertainty about where all of these polices will eventually settle and what their lasting effects on the economy will be.”
While the effects of tariffs on consumer prices “are now clearly visible,” Powell said, they will continue to mount in the months ahead, “with high uncertainty about timing and amounts.”
It’s reasonable to assume that the impact of tariffs “will be relatively short-lived,” Powell said. But the Fed also has to be wary that upward pressure on prices “could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed.”
Powell stressed that the Fed’s rate policy is “not on a preset course” and that future decisions will be based solely on “assessment of the data and its implications for the economic outlook and the balance of risks. We will never deviate from that approach.”
Powell and other Fed policymakers have been under intense pressure from the Trump administration to lower rates.
The pressure campaign has included allegations that Powell mismanaged renovations of the central bank’s Washington, D.C., campus, and that Federal Reserve Governor Lisa Cook engaged in mortgage fraud.
Powell and Cook deny wrongdoing and have said they won’t bow to the Trump administration’s calls for their resignations, which critics say threaten to undermine the Federal Reserve’s independence.
The Aug. 1 surprise jobs report prompted President Trump to fire Bureau of Labor Statistics Commissioner Erika McEntarfer, accusing the economist of having manipulated the payroll numbers “for political purposes.” Both conservative and liberal economists have raised questions about the qualifications of Trump’s pick to succeed McEntarfer, E.J. Antoni, Axios reports.
Powell’s term as Federal Reserve chair ends in May, and if his successor is viewed as more willing to bend to the president’s will, that could undermine investor confidence in U.S. debt, economists told The New York Times.
“Economists warn that if investors lose confidence in the independence of the Fed, or in the reliability of U.S. inflation data, they will begin to see the United States as a riskier place to invest,” the Times reported Friday. “In the short term, that could result in higher borrowing costs for the government, leaving less money for priorities like infrastructure and education. In the long run, it could increase the risk that the government will be unable to borrow affordably to respond to a crisis.”
The Fed can’t dictate mortgage rates
Although the Federal Reserve has direct control over short-term interest rates, investor demand for bonds and mortgage-backed securities determines interest rates paid by homebuyers and the government when it borrows money.
When the Fed cut the short-term federal funds rate by a percentage point at the end of last year, mortgage rates went up by an equal amount when inflation moved away from the central bank’s 2 percent target.
But if the economy is running out of steam, mortgage rates are likely to come down in tandem with Fed rate cuts.
Economists at Pantheon Macroeconomics think unemployment will rise faster than policymakers are currently expecting, leading the Fed to cut short-term rates by three-quarters of a percentage point at its final three meetings of the year.
Unemployment holding steady
According to the Bureau of Labor Statistics, 7.24 million Americans were out of work in July, bringing the unemployment rate to 4.2 percent. Unemployment has been holding steady at around 4.2 percent for the past year.
But a rise in continued unemployment claims since April “suggests that the recent stability in the unemployment rate is something of an illusion,” Pantheon Senior U.S. Economist Oliver Allen said in a note to clients Friday.
Oliver Allen
“We agree with [Powell] that growth in the labor supply is likely to slow due to the Trump administration’s tougher migration policies, but think the jury is still out on the extent to which this has already lowered the ‘break-even’ rate of payroll growth required to prevent the unemployment rate from rising,” Allen said.
With other indicators of “labor market slack” — such as the share of people who are not in the labor force but want a job — rising over the past few months, Pantheon forecasts that the unemployment rate will rise to 4.75 percent by the end of the year.
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