Mortgage Rates to Remain Mostly Unchanged After Stronger-Than-Expected Jobs Report

The U.S. added more jobs than expected in June, and the unemployment rate declined despite expectations that it would increase. Mortgage rates may rise slightly in the short term, but they’ll stay mostly unchanged. 

The June jobs report was stronger than expected. That means mortgage rates will tick up slightly today, but stay mostly unchanged. The strength of the latest jobs report rules out a July rate cut; however, for the second month in a row, the headline strength disguises underlying weakness–which leaves a September rate cut on the table. 

The numbers: 147,000 jobs were added in June, more than the 110,000 expected by forecasters and 144,000 in May. Similarly, the unemployment rate declined to 4.12% from 4.24% despite expectations it would increase to 4.3%. For the first time since January, revisions to previous months were positive, adding 16,000 more jobs than earlier reported. The unemployment rate has been bouncing around between 4% and 4.2% for about a year, showing no sign of increasing.

With immigration having come to a halt and some migrants leaving, the underlying breakeven rate of job creation is lower now than in the past few years. This means that job creation can slow without the Fed having to worry about a recession.

However, the numbers are not as rosy as they first appear. Much of the hiring was concentrated in state and local government, and likely distorted by seasonal factors. Also, the unemployment rate decrease was mostly due to people leaving the labor force, a worrisome sign for the labor market.

Of the 147,000 jobs added, almost half (73,000) came from the government with the private sector only adding 74,000 jobs. Within the government, almost all of the hiring (64,000 jobs) came from education in state and local government (federal government hiring was down as expected due to the DOGE cuts). This hiring is unlikely to be real. Rather, it’s likely an artifact of the school year ending later than usual, which is confusing the seasonal adjustment model being used by the Bureau of Labor Statistics.

Within the private sector, almost 59,000 of the 74,000 total jobs added were in healthcare and an additional 20,000 jobs were in leisure and hospitality. Many other sectors, including manufacturing, were negative. Such concentration of job creation, especially in non-cyclical sectors, is a potential sign of weakness.

While the number of unemployed individuals did decrease, most of the unexpectedly large decline in the unemployment rate is because the number of people who left the labor force increased. The labor force participation rate declined from 64.4% to 64.3% in June and the number of marginally attached workers who are discouraged almost doubled.

Overall, today’s labor market is one where employers are reluctant both to hire and to fire. For workers, it’s increasingly difficult to find a job outside of healthcare and education.

July rate cut off the table; September rate cut on the table. The Fed has no reason to cut rates at the July 30th meeting. However, the September 17th meeting is still far enough away that the narrative could flip and support the case for a rate cut then, as markets are expecting. Futures market implied odds of a July rate cut declined from about 20% to about 5% following the release of this data. There may be dissents from Michelle Bowman and Christopher Waller at the July meeting, but the committee will hold rates steady.

Markets see an 81% chance of a rate cut in September. That rate cut is certainly possible though 81% feels high. For the cut to materialize, all of the following has to be true:

The August and September jobs reports show some labor market weakness, which would represent a change from previous months. The July, August, and September CPI reports continue to be mild.The Fed believes that any tariff-related inflation impacts are a one time event that monetary policy does not need to address

Today’s generally strong jobs report increases the odds that the neutral rate (the Fed funds rate that neither stimulates nor contracts the economy) is higher than previously thought. That would imply that, tariffs impacts aside, the Fed actually does not have that much more room to cut if they’re not trying to stimulate the economy.

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