Fed will move, but economists debate when and how

The difference in share between economists who believe the next Federal Open Market Committee move will be a cut in short-term rates compared to those expecting a rise further narrowed in August, Wolters Kluwer found.

However, its latest Blue Chip Economic Indicators poll was conducted on Aug. 4 and 5, prior to Friday's release of worse-than-projected jobs data from the Bureau of Labor Statistics.

The survey bias still leans toward a reduction, with 58% of economists supporting this in the latest survey, versus 42% who believed the next move would go higher. In July, the split was 68% to 32% in favor of a cut.

How Friday's jobs report could affect mortgage rates

However, the poor labor data has shifted market sentiment.

The softer jobs market shifts the balance at the FOMC away from further tightening, which could help keep mortgage rates in check, said Sam Williamson, senior economist at First American Financial, in a Friday morning comment after the data release.

While what the FOMC does has no direct effect on mortgage rate movements, investors price those sentiments into the 10-year Treasury yield. This is one of the mechanisms lenders use to set rates for the 30-year fixed.

"A lower risk of additional Fed tightening could help keep a lid on longer-term interest rates and mortgage rates, easing some pressure on affordability," Williamson said. "Slower hiring can also weigh on job mobility and consumer confidence, so the housing benefit is likely to be modest."

The weaker data might give the FOMC some breathing room as it considers its next policy move, said Joel Kan, deputy chief economist at the Mortgage Bankers Association, in his Friday unemployment data analysis.

However, he pointed out inflationary pressures are likely to persist through the remainder of the year, without "a clear end in sight" for the Iran conflict.

"We anticipate that the Federal Reserve will raise the fed funds rate in early 2027, but any additional upside surprises to inflation are likely to bring that timetable forward," Kan said.

The case for a September rate hike has been eliminated, said Nigel Green, CEO of the deVere Group, in Friday morning commentary.

"A jobs report this weak, layered on top of two months of substantial downward revisions, makes a hike next month almost impossible to justify," Green said.

"Three consecutive months of softening data is not noise," he continued. "It's a labor market losing momentum in a way policymakers cannot responsibly ignore."

What is the next meeting when the Fed will act

What hasn't changed is the BCEI panelists' timing expectations for a shift in either direction. In the most recent survey, 16% believed the next move from the FOMC will come at the following meeting in September; this was 15% in the July survey. In early July's poll, 2% expected a move at that month's meeting.

None of the economists in the survey expect a change in October. The August survey included the December meeting date, and 9% said they think the FOMC will make a move then. The remaining 74% said later. Combined, this is the same share as the "later" response for the July survey.

The consensus is for the fed funds rate to be at 3.697% at the end of this year and 3.475% for 2027. Both are higher than in the July survey, at 3.665% and 3.406%, respectively.

"While oil and equity prices have fluctuated widely this year, interest rates have followed a near-steady path upward," the Wolters Kluwer report said. "The yield on 10-year Treasury securities has climbed approximately 70 basis points since late February, including 30 basis points in the past six weeks."

The BCEI panel pushed its outlook higher for both the 10-year and 3-month yields by 10 basis points.

However, "rates are still inching lower over the forecast horizon, but now starting from a higher level," the report said.