Will Rate Cuts Help Mortgage Rates?
Will Rate Cuts Help Mortgage Rates?
The Federal Reserve is widely expected to cut rates next week, but history shows that Fed cuts don’t always translate into lower mortgage rates — at least not right away. In fact, we saw this exact dynamic play out in Q4 of 2024.
A Look Back at Last Year
Heading into the Fed’s 50 bps cut on September 18, 2024, the bond market had already adjusted. The 10-year Treasury yield — which drives long-term mortgage rates — had dropped by 5/8% in anticipation of the move. Mortgage rates stabilized for a few weeks after the cut. It wasn’t until October, when a string of “blockbuster” jobs reports was released, that rates began moving higher.
But those jobs weren’t real — or at least not to the extent originally reported. Over the following months, the Bureau of Labor Statistics (BLS) revised those job gains lower. And now, the Quarterly Census of Employment and Wages (QCEW), released this week, confirms that the revisions were the largest downward adjustments on record.
What the QCEW Revealed
The QCEW is considered the gold standard of employment data because it uses actual payroll records rather than surveys. The new release showed:
Payroll growth in the 12 months through March 2025 was originally reported as +1.75 million jobs.
After revisions, that number was cut by 911,000 jobs.
On average, job gains were overstated by 76,000 per month — meaning 52% of the jobs reported never existed.
To put it plainly: nearly half of the employment growth that markets relied on last year was illusory. This helps explain why mortgage rates shot higher in Q4 2024 — the market was reacting to data that exaggerated the strength of the labor market.
Where We Stand Now
Fast forward to today, and markets appear to be anticipating a similar setup, but with an important difference: the labor market is now showing genuine signs of weakness.
Since Jackson Hole on August 22, the 10-year yield has already fallen from 4.32% to 4.05% — a 27 bps drop ahead of next week’s Fed meeting.
The NY Fed’s Consumer Expectations Survey (August) showed that the probability of finding a job if one were lost fell to 45% — the lowest reading since 2013.
This suggests that, unlike last year, weaker jobs data may not derail the recent move lower in mortgage rates.
Inflation Still a Concern
On the inflation front, the latest CPI report came in at 0.38% for the month, hotter than expected, bringing the year-over-year rate to 2.9%. Core CPI, which strips out food and energy, was in line with estimates but remains elevated — largely due to the heavy weighting of Owners’ Equivalent Rent (OER).
OER is a survey-based measure of what homeowners think their home would rent for if vacant. Critics argue this tends to inflate inflation readings, as many homeowners assume their homes would rent at a premium, even unfurnished and without utilities. Meanwhile, actual rental data receives less than one-third the weighting of OER.
Short-term inflation run rates (3- and 6-month annualized measures) remain above the Fed’s 2% target, though some argue recent tariffs are temporarily distorting the data. This dynamic is one reason markets now assign just a 9–10% probability of a larger 50 bps rate cut next week.
What this Means for Mortgage Rates
Rate cuts don’t always mean lower mortgage rates. The recent downward move of the 10 year treasury shows that the expected 25 bp cut is already priced into the market.
Last year, after a similar move, we saw how faulty jobs data kept pressure on the bond market. This time, however, with the largest downward jobs revisions on record and fresh signs of labor market weakness, the backdrop looks different. Mortgage rates could finally get some lasting relief.
