Weak jobs data is expected to outweigh inflation numbers as the Fed considers a rate cut next week — which could be followed by more before the end of the year.

Key points:

  • Mortgage rates fell to 6.35% this week, the biggest weekly drop this year.
  • Buyer demand was well above last year’s level, with mortgage purchase applications up 23% year-over-year.
  • Inflation ticked up to 2.9%, but a struggling labor market will likely push the Fed to cut short-term rates even as the CPI remains above target.

It’s been a week of highs and lows: The labor market is worse off than previously thought, and inflation is up — but mortgage rates posted their largest weekly drop in the past year and mortgage applications are on the rise.

What does this mean for consumers — and the Federal Reserve? 

Mortgage rates plunge, applications surge

Hopeful homebuyers have reason to cheer today, with the average 30-year mortgage rate falling to 6.35%, the lowest level since Oct. 2024 and the biggest drop of the year, according to Freddie Mac. Last week, rates averaged 6.5%. 

Mortgage News Daily’s report should provide even more optimism, pegging the daily rate at 6.27% on Sept. 11.

This is the eighth consecutive week of steady or declining rates, and consumers are responding, according to Joel Kan, VP and deputy chief economist at the Mortgage Bankers Association. 

“The downward rate movement spurred the strongest week of borrower demand since 2022,” Kan said, as applications rose 9.2% overall for the week ending Sept. 5. Purchase applications increased 7% and were up 23% year-over-year. Refinance applications also made a strong showing, ticking up 12% for the week.

While rising home prices largely offset declining rates, according to Bright MLS Chief Economist Lisa Sturtevant, “the drop below 6.5% could have an important psychological effect,” enticing buyers who can afford to act.

Inflation, jobs numbers paint a less rosy picture

Retail inflation rose in August to 2.9% after holding steady at 2.7% in June and July, according to the latest Consumer Price Index (CPI) data from the Bureau of Labor Statistics (BLS). While the increase was in line with expectations, the inflation rate is now back to the highest level since January. 

The CPI numbers come on the heels of a weak jobs report and a significant downward revision of labor market figures — a combination of data points the Federal Reserve will be evaluating when it meets next week.  

“Today’s [CPI] report is arguably the most-watched inflation data of the year,” Sturtevant said, calling it “another cautionary sign for the housing market.” But its effect on potential rate cuts could be muted, as Sturtevant expects the Fed to give “more weight to the labor force numbers.” 

A big September rate cut?

The jobs data has led to speculation that not only will the Fed almost certainly cut short-term interest rates next week, but it may cut rates at each of its three remaining meetings this year. 

That’s what most analysts are betting on, at least. As of Thursday morning, stock traders put the odds of three consecutive 25-point cuts at 75%, according to the Wall Street Journal.  

But could the Fed take more aggressive action and go with a 50-point cut, as it did a year ago? With two Federal Reserve Board governors losing their bid for a July cut, it’s possible that a larger cut could be on the table.

Economist forecasts are mixed, however, with most predicting more conservative action. Sturtevant expects a 25-point cut “and not something larger” in September, while Melissa Cohn, regional VP of William Raveis Mortgage, thinks it could go either way given the push-pull between the labor figures and the inflation numbers. 

There’s a lot “for the Fed to chew on in order to make its decision,” Cohn said.