Mortgage rates decreased this week as labor market and housing data continue to point to a slowdown ahead. Financial market participants anticipate two 25-basis point cuts in the federal funds rate before the end of the year as well. Last week, the Federal Reserve chair put to rest the idea of potential rate hikes and indicated yet again that Fed policy is restrictive and should help bring inflation down further. The Fed also pointed to a slowdown in the pace of decline of its securities holdings, helping to pull Treasury yields — which mortgage rates tend to follow — lower. 

Long-term interest rates, like mortgage rates, depend on expected inflation and economic growth. The latest employment report showed that the labor market has continued to loosen, due in part to a rising labor force. More homes are coming on the housing market, alleviating pressure on house prices and rents as the gap between supply and demand shrinks. Lastly, indicators of activity in the services sector – which had propped up the US economy – show the sector has slid into contraction territory for the first time since December 2022. 

Next week’s consumer price index and producer price index releases will likely cause more repricing activity. Expect more rate volatility ahead as the Fed and investors wait for more conclusive evidence of a return to low, stable and more predictable inflation.