Fed warms to rate cuts, but labor risks could hurt home sales

Cutting short-term rates two more times in 2025 could push down mortgage rates, but Fed Chair Jerome Powell said tackling high home prices is “not what we do.”

Even though the ongoing government shutdown has left the Federal Reserve without the latest jobs data, the board appears increasingly concerned about the labor market. That could be good news for mortgage rates, but not for the overall real estate market.

In an Oct. 14 speech at the National Association for Business Economics conference, Federal Reserve Chair Jerome Powell said the "downside risks to employment appear to have risen," supporting what some other Federal Reserve Board members have been saying in recent days.

That alignment suggests the Fed is leaning toward cutting short-term interest rates when it meets Oct. 28-29 — and may vote for another cut when it convenes in December. While the short-term rate isn't directly tied to mortgage interest rates, such cuts could lead to a drop in mortgage rates if inflation doesn't continue to rise.

The 30-year mortgage rate has remained in a narrow range since the last rate cut in September, hovering around 6.3%.

Rising home prices are out of the Fed's hands: In the question-and-answer session following his speech, Powell touched on real estate, but when asked how the Fed might address high home prices and affordability, Powell said "I don't know how we would," noting that the board is focused on overall inflation rather than specific sectors.

"We would certainly not engage in mortgage-backed security purchases as a way of addressing mortgage rates or housing directly," Powell added. "That's not what we do."

Rate cut rumblings: Other Fed officials have also been speaking out. Philadelphia Fed President Anna Paulson played down inflation concerns in an Oct. 13 speech, noting that new tariffs have not spurred sustained price increases.

"So long as inflation expectations are anchored, increases in prices due to supply effects do not turn into an inflation problem," Paulson said. Although not currently a voting member, Paulson cited the slowdown in the labor market as a reason to lower rates.

That sentiment has been echoed by governors Christopher Waller and Michelle Bowman. 

Waller, who has been pushing for rate cuts for months, reiterated that stance last week on CNBC's "Squawk Box," but noted that the Fed should proceed with caution. "I want to move towards cutting rates," he said, "but you're not going to do it aggressively and fast, in case you make a big mistake on which way that things go."

Bowman also favored a summer rate cut, and on Oct. 14 said the board should make "two more cuts before the end of this year" given current economic conditions, Reuters reported. "I think as long as we see the labor market and other economic data evolving in the way that I expect, then we will continue to be on a path for lowering the federal funds rate," Bowman said.

Some are less confident about cuts: Fed Governor Michael Barr remains concerned about inflation, recently suggesting it could stay above the target rate of 2% for more than two years.

In a speech last week, Barr pointed to the rise in inflation since April, saying it was "no coincidence" that it coincided with the announcement of steep import tariffs — something he believes the board should not dismiss as a one-time spike. The best approach, he said, is to "balance the risks to both sides of our mandate as we continue to assess the economic outlook."

"If we see inflation moving further away from our target, then it may be necessary to keep policy at least modestly restrictive for longer. If we see heightened risks in the labor market, then we may need to move more quickly to ease policy," Barr said.

Inflation data is coming: While the shutdown has delayed some reports, the Fed will get a bit of information to chew on before it meets. The Bureau of Labor Statistics plans to release its Consumer Price Index on Oct. 24, a little over a week later than originally scheduled. 

No other releases will be produced until the government shutdown ends, according to the BLS.

How the job market affects real estate: While the weakening labor market could convince the Fed to lower interest rates, that wouldn't necessarily lead to more home sales. 

A tepid job market typically has a dampening effect on sales since there are fewer qualified buyers, and if the rising unemployment rate leads to more foreclosures, that could potentially spur demand — increasing competition or bidding wars. 

By Dave Gallagher on Real Estate News