Fed rate hike less likely after job gains miss the mark
A weaker labor market may cool inflation and push rates down, which could rally homebuyers. But fewer job changes and wage boosts could also hurt the market.
The latest jobs report came in soft enough to give the Federal Reserve an opportunity to pause on rate hikes. But forecasters still widely expect that another increase is coming before the end of this year.
Summer ends with weaker-than-expected job gains: The U.S. economy added 29,000 jobs in September — well short of what was forecast — while the unemployment rate ticked up slightly to 4.2% as more people looked for work, according to the U.S. Bureau of Labor Statistics. Analysts had expected that 84,000 jobs would be added and that the labor market would remain in the low-hire, low-fire pattern that has persisted for most of 2026.
Meanwhile, wage growth stalled to its slowest pace since May 2021, up just 3% year-over-year, and is tracking below inflation, which was up 3.4% annually in August.
Time for a rate pause? After Friday's release of the latest batch of labor market data, investors lowered their expectations of another short-term interest rate hike following the Fed's 25-basis-point increase in mid-September. As of the morning of Oct. 2, the CME Group's FedWatch forecast estimated that there was a 21.6% chance that the Fed would raise interest rates at its Oct. 27-28 meeting, down from 64.2% a week ago.
Mortgage rates briefly tick down: The September jobs report had an initially positive impact on mortgage rates. Mortgage News Daily estimated that the 30-year fixed-rate mortgage had declined for two straight days, falling to 7.49% Friday morning after climbing to 7.6% earlier this week. Continuing the trend of volatility, the rate bounced back up to 7.57% Friday afternoon.
The latest labor market data indicates that the economy is neither nearing a recession nor overheating, according to Lawrence Yun, chief economist at the National Association of Realtors.
"Mortgage rates could see slight relief after brutal rises over the past month," Yun said. "That's because the job market will not exert upward inflationary pressure and oil prices have retreated somewhat."
Real estate environment expected to remain tough: An October rate pause is unlikely to get the phones ringing at real estate offices, however. Inflation and the impacts of the ongoing U.S.-Iran war on energy prices are worrying investors, with 10-year Treasury yields still rising. If that sell-off of bonds continues, mortgage rates are likely to climb even higher.
"For consumers and the housing market, the squeeze continues at both ends, with a still sluggish labor market on one side and financial conditions getting tougher rather than easier on the other," said Jake Krimmel, senior economist at Realtor.com.
A softer job market could lead to cooling inflation. But there's a tradeoff — a weak job market also means fewer job changes, raises and relocations, noted Sam Williamson, senior economist at First American.
"Even so, lower mortgage rates could help buyers hold onto more of those affordability gains. That may be enough to keep a floor under housing activity, even if the weaker hiring backdrop leaves little room for a meaningful rebound," Williamson said.