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A surprisingly strong jobs report sent mortgage rates soaring Friday, with analysts saying the Federal Reserve can now afford to be more cautious about the pace of future rate cuts and that mortgage rates are unlikely to fall below 6 percent anytime soon.
Employers added 254,000 workers to their payrolls in September and unemployment declined for the second month in a row, to 4.1 percent, the Bureau of Labor Statistics reported — blowing away forecasts that payrolls would swell by 150,000.
The September employment situation report showed strength “across every dimension,” Mortgage Bankers Association Chief Economist Mike Fratantoni said in a statement.
The report also included upward revisions to previous estimates of job growth in July and August, and showed wage growth “reaccelerating” to 4 percent, Fratantoni noted.
Mike Fratantoni
“All of these signs point toward a successful ‘soft landing,’ but also stoke worries that inflation may not move in a straight line to the Fed’s 2 percent target,” Fratantoni said. “This report could certainly slow the expected pace of rate cuts.”
The MBA forecasts that longer-term rates, including mortgage rates, will remain within a relatively narrow range over the next year.
“This news will push mortgage rates to the top of that range, but we do expect that mortgage rates will stay close to 6 percent over the next 12 months,” Fratantoni said.
Yields on 10-year Treasurys, which are often a good indicator of where mortgage rates are headed next, jumped 12 basis points on the news, and are up 37 basis points from a 2024 low of 3.60 percent registered on Sept. 17.
In attempting to balance their goal of bringing inflation down to 2 percent without tilting the economy into a recession, Federal Reserve policymakers approved a dramatic, 50 basis-point reduction in short-term interest rates on Sept. 18.
But bond market investors had already anticipated that move, so it was already priced in to mortgage rates. Rates on 30-year fixed-rate loans hit a 2024 low of 6.03 percent on Sept. 17, according to rate-lock data tracked by Optimal Blue, and as of Thursday had already climbed 15 basis points, to 6.18 percent.
Mortgage rates rising again
Although Optimal Blue data lags by a day, a survey by Mortgage News Daily (MND) showed rates for 30-year fixed-rate loans soaring by 27 basis points Friday — more than a quarter of a percentage point.
That’s one of the largest single-day jumps the MND survey has ever recorded, COO Matthew Graham said.
“Today’s much-anticipated jobs report ended up coming out much stronger than expected,” Graham wrote for MND. “A stronger result was all but guaranteed to cause carnage (relative) in the mortgage market and that’s definitely what we’re seeing.”
Long-term interest rates on mortgages and government debt have been steadily rising in the aftermath of the first Fed rate cut in more than four years because policymakers at the central bank telegraphed that they expected to move more cautiously in the future.
The latest Fed “dot plot” showed policymakers envisioned making more modest 25 basis-point cuts in November and December, followed by several rate cuts totaling 1 percentage point in 2025.
Some forecasters had warned that the Fed might have to cut rates at a faster pace than laid out in the dot plot if hiring slows and unemployment rises more rapidly than expected.
But bond market investors now see little chance that the Fed will continue to cut rates aggressively at its two remaining meetings this year, which conclude on Nov. 7 and Dec. 18.
The CME FedWatch tool, which tracks futures markets to predict the odds of future Fed moves, on Friday put the odds of a 50-basis point rate cut in November at zero, down from 32 percent on Thursday and 53 percent on Sept. 27.
“We are either in the mother of all soft landings, or some on the Fed are rethinking their outsized half percent cut in September,” KPMG U.S. Chief Economist Diane Swonk posted on X.
Unemployment rate dips for second month in a row
A big jump in unemployment in July had triggered the “Sahm Rule,” a recession indicator named for economist Claudia Sahm. Sahm’s research has shown the economy is likely to already be shrinking whenever the three-month moving average of the unemployment rate rises by 0.50 percentage points or more relative to the minimum three-month averages from the previous 12 months.
Diane Swonk
“We are still in the red on the Sahm Rule, but it is unusual for unemployment to fall after it has moved up,” Swonk said. “Rules were meant to be broken post-pandemic.”
Both the unemployment rate, at 4.1 percent, and the number of unemployed people, at 6.8 million, remain higher than a year ago, when the jobless rate was 3.8 percent and the number of unemployed people was 6.3 million.
But Swonk noted that the drop in the ranks of the unemployed in September was the biggest monthly drop since March 2022 — “stunning and more welcome news.”
Job growth bucking downtrend
Since peaking at 939,000 in July 2021, job growth has been steadily cooling — to the relief of many employers and economists who viewed wage growth fueled by worker shortages as a driver of inflation.
After nearly dropping below 100,000 in April and June, job growth has picked up for three months in a row, easing recession fears.
September marked a record 45 consecutive months of 100,000 or more jobs added, First American Deputy Chief Economist Odeta Kushi noted.
Odeta Kushi
“Not to mention, with revisions, employment in July and August combined is now 72,000 greater than previously reported,” Kushi said in a statement. “All that to say, a soft-landing scenario is still possible.”
Fratantoni noted that while aggregate job gains were strong, “growth was concentrated in a few industries — notably food services, health care, construction, and government hiring. Spending and hiring at restaurants and bars is potentially at risk if consumers continue to pull back on discretionary items, as some data have indicated.”
It remains to be seen how Hurricanes Francine and Helene will impact job growth and hiring. Hurricane Francine, which made landfall in southern Louisiana on Sept. 11, 2024, appears to have “had no discernible effect on national payroll employment, hours, and earnings,” the Bureau of Labor Statistics said.
Hurricane Helene, which carved a path of death and destruction through Florida, Georgia, South Carolina, North Carolina, Tennessee and Virginia after making landfall on Florida’s Gulf Coast Sept. 26, could impact October’s jobs report, although employees who are paid for even one hour of work are considered employed.
Another potential threat to the economy — a strike by dockworkers on the East and Gulf coasts — looks to have been headed off with a tentative agreement between the International Longshoremen’s Association and the United States Maritime Alliance announced Thursday. After walking off the job for three days, dockworkers have agreed to return to work through at least Jan. 15 while outstanding issues are negotiated.
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