Mortgage rates dropped sharply in tandem with stocks Friday after a weak jobs report raised the odds of a Fed rate cut in September — despite signs that inflation is also on the rise, and an announcement that the U.S. will impose new tariffs on dozens of countries on Aug. 7.
Yields on 10-year Treasury notes, a barometer for mortgage rates, fell 14 basis points Friday as investors sold stocks and sought safety in long-term bonds. A basis point is one hundredth of a percentage point.
Rates on 30-year fixed-rate mortgages also came down by 12 basis points, according to lender data tracked by Mortgage News Daily. Like bonds, investors view mortgage-backed securities that fund most home loans as a safe haven during stock market downturns.
The latest payroll data from the Bureau of Labor Statistics (BLS) took economists and investors by surprise.
Not only was July payroll growth of 73,000 jobs about 30 percent less than expected, but previous estimates of hiring in May and June were revised down by a total of 258,000 jobs.
According to the revised estimates published by the BLS on Friday, payrolls grew by just 19,000 jobs in May and 14,000 in June — the slowest rate since December 2020.
The employment gains that weren’t wiped out by the revisions “have been driven almost exclusively by the healthcare sector,” Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs said in a note to clients.
Employment in manufacturing, retail, trade, transportation and logistics got a boost earlier this year, as companies rushed to buy imported goods and raw materials ahead of tariffs announced by the Trump administration in April. That trend is now reversing as the tariffs take effect, Tombs said.
“Manufacturers have reduced payrolls by 37,000 over [the last three months], while employment in distribution-related sectors has trended down since February,” Tombs said. “Producers and retailers fear that demand will falter in response to tariff-related price rises and therefore are cutting labor costs.”
The Trump administration on Thursday announced a new round of tariffs on 66 countries and the European Union effective on Aug. 7.
On top of previously announced tariffs, the additional duties will bring the overall average effective tariff rate on imported goods to 18.3 percent — the highest since 1934, according to an analysis by The Budget Lab at Yale. At that level, The Budget Lab Estimates tariffs will push prices up by 1.8 percent, adding to inflationary pressures.
But the latest payroll numbers — which also showed unemployment rising to 4.2 percent in July — up the odds of a September Fed rate cut, as policymakers at the central bank juggle their dual mandate to maximize employment while keeping inflation in check.
Futures markets tracked by the CME FedWatch tool show positions taken by investors on Friday imply an 81 percent chance of a Sept. 17 Fed rate cut, up from just 38 percent on Thursday.
Job growth petering out
Over the last three months, payrolls have grown by an average of 35,000 a month, down from 168,000 a month last year.
Erika McEntarfer
President Trump took to Truth Social on Friday after the report’s release to announce he had fired BLS
Commissioner Erika McEntarfer, accusing the economist of having manipulated the payroll numbers “for political purposes.”
Tombs and other economists attribute the downward revisions to late responses. A decade ago, close to three quarters of businesses responded to BLS surveys in time to be included in first estimates.
The response rate for the first estimate in July was 58 percent, Tombs said, and late responses “are nearly always weaker than those received on time, probably because struggling small businesses disproportionately file late.”
Heather Long
Trump’s decision to fire McEntarfer, “is basically unprecedented and will raise concerns about U.S. data integrity going forward,” Navy Federal Credit Union Chief Economist Heather Long posted on the social media platform X.
In addition to its jobs reports, the BLS is responsible for tracking the consumer price index (CPI), and productivity and wage statistics, Long noted.
“I’ve been calling this a “frozen” job market for awhile,” Long said in a separate post. “Now I would call it a red flag.”
Long predicted that an annual benchmarking set for Sept. 9 “may even show job losses” or “certainly an even weaker labor market so far in 2025.”
Tombs said forecasters at Pantheon Macroeconomics expect first estimates of payrolls will hover near 75,000 in the months ahead.
Samuel Tombs
“Tariff-driven price increases for goods likely will restrain real spending and trigger the further unwind of jobs created in the distribution sector earlier this year,” Tombs said. “Meanwhile, the adverse impact on business investment from the plunge in confidence in boardrooms this spring will emerge over coming months, weighing on labor demand.”
Trump also expressed anger with Federal Reserve Chair Jerome Powell over the central bank’s decision not to lower rates Wednesday, saying he should “be put out to pasture.”
After Wednesday’s 9-2 vote to leave short-term interest rates unchanged, Trump claimed that there is “no inflation” and that lowering the federal funds rate would help more people buy homes.
But inflation is again on the rise, and the Federal Reserve doesn’t have direct control over mortgage rates — which went up last year when the Fed cut rates.
The Fed has a dual mandate to keep as many people working as possible, without letting inflation get out of control.
Keeping short-term interest rates too high for too long — which the Trump administration maintains the Fed has done — discourages borrowing, which could slow the economy and lead to layoffs. But cutting rates prematurely could stimulate the economy and rekindle inflation, as happened last fall.
After peaking at 7.2 percent in June 2022, the Fed’s preferred gauge of inflation, the personal consumption expenditures (PCE) price index, had gradually been returning closer to the central bank’s target of 2 percent annual inflation.
Inflation on the rise again
But after hitting a 2024 low of 2.1 percent annual growth last September, the PCE price index rebounded to 2.7 percent in February after the Fed cut interest rates by a full percentage point at its final three meetings last year.
The latest reading of the PCE price index, published on July 31, showed inflation moving away from the Fed’s 2 percent target for the second month in a row in June.
Core PCE, which excludes volatile food and energy prices, rose to 2.8 percent in June.
Analysts at Pantheon Macroeconomics expect core PCE inflation to hit 3.25 percent by the end of the year, as the costs of tariffs are passed on to consumers. They warn inflation could go higher if the U.S. imposes additional tariffs on goods from countries that haven’t negotiated trade deals with the U.S.
But Pantheon Macroeconomics expects the Fed “to prioritize the softening labor market” and start cutting rates in September.
Unemployment back at 4.2%
The unemployment rate rose to 4.2 percent in July, as the ranks of the unemployed grew by 221,000 from June, to 7.24 million.
Pantheon forecasts the Fed will bring short-term interest rates down by one-fourth percentage point at each of its final three meetings of the year, or a total of three-fourths of a percentage point.
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