How August and September Economic Data Could Shape the Federal Reserve’s Next Move—and What It Means for the Mortgage Market

As we move through the latter half of 2024, all eyes in the financial markets are on the upcoming economic data and the Federal Reserve's highly anticipated meeting on September 18th. With interest rates remaining a critical factor in the mortgage industry, loan officers and homebuyers alike are watching closely to see how the economic news in the coming weeks could influence the Fed’s decision on rates.

The Market’s Expectations

Currently, a 25-basis point (bps) rate cut is widely expected and already priced into the financial markets, including mortgage rates. However, there is growing hope that the Federal Reserve might take a more aggressive stance and cut rates by 50 bps. The possibility of a larger cut has led to heightened anticipation in the markets. Should the Fed opt for only a 25-bps cut, despite the hopeful sentiment for 50 bps, it could lead to market volatility as expectations are adjusted.

Here’s a breakdown of the key economic reports to watch and what they might mean for the Federal Reserve’s next move:

August 28th: Personal Consumption Expenditures (PCE)

The PCE price index is one of the Fed's preferred measures of inflation. The report will provide insights into whether inflation is continuing to cool down, especially when excluding volatile food and energy prices (core PCE). A softer-than-expected PCE could give the Fed more leeway to cut rates by 50 bps. On the other hand, if inflation proves more stubborn, the Fed might stick to a more cautious 25 bps cut.

September 6th: Non-Farm Payrolls (Jobs Report)

The jobs report is a crucial indicator of labor market strength. If the report shows continued job growth, it could indicate that the economy can withstand a more significant rate cut without overheating. However, a weakening labor market might limit the Fed to the expected 25 bps cut to avoid signaling panic. Any surprises in this report could have a direct impact on the Fed’s decision-making process.

September 11th: Consumer Price Index (CPI)

Like the PCE, the CPI is a vital measure of inflation, though it tends to reflect price changes more directly felt by consumers. A lower-than-expected CPI reading could bolster the case for a 50-bps cut, while a higher CPI might reinforce the Fed’s preference for a more measured approach.

September 18th: Federal Reserve Meeting

The culmination of these reports will inform the Fed’s decision on September 18th. While a 25-bps cut seems all but certain, the market’s hope for a 50-bps cut creates the potential for volatility if the Fed doesn’t deliver. Mortgage rates, which have already priced in the smaller cut, could experience some movement if the Fed either surprises the market with a larger cut or disappoints with only the expected 25 bps.

What It Means for Homebuyers and Mortgage Professionals

For those in the mortgage industry, the Fed’s decision will have a direct impact on borrowing costs. If the Fed cuts rates by 50 bps, it could lead to a more substantial drop in mortgage rates, potentially spurring more homebuying activity. However, if the Fed sticks to the expected 25 bps cut, mortgage rates may remain stable or experience slight upward pressure as the market reacts to unmet expectations.

Either way, the coming weeks will be critical for the housing market, and staying informed on the upcoming economic reports will be essential for mortgage professionals to provide guidance to their clients during this uncertain time.

Conclusion

In this environment, it’s important to communicate with clients about the potential outcomes and the impact on their mortgage options. Preparing for either scenario—whether the Fed delivers a 25 bps, or a 50-bps cut—can help both buyers and industry professionals navigate the changing landscape.

John McClellan

[email protected]

512-589-8088

NMLS #207768