The start of the year is the perfect time to focus on strategies that matter most. This week’s Steady Investor highlights three key themes that are shaping the current market:
- The Fed signals a pause in rate cuts
- The hidden force driving mortgage rates lower
- Unemployed office workers face challenges finding new jobs
The Fed Signals a Coming ‘Pause’ in Rate Cuts – Many economic forecasters and large banks anticipate 50 basis-points or more of rate cuts in 2025. The Fed wants everyone to know those cuts are not a given. In parsing the minutes from the December 17-18 policy meeting, it was clear that a majority of Fed officials saw the December 25 basis-point cut as appropriate given year-over-year progress on inflation, a notable softening in the labor market (via fewer hires, not increased layoffs), and the overarching desire to bring the benchmark fed funds back toward the so-called “neutral rate.” According to the minutes, however, the rate cut was still a close call, and “participants indicated that the committee was at or near the point at which it would be appropriate to slow the pace of policy easing.” On one hand, the Fed is showing signs of concern that inflationary pressures may be more “sticky” than anticipated, especially given the slight reacceleration seen in Q4 2024. On top of that, some Fed officials appear to be adopting a ‘wait-and-see’ posture regarding the potential impact of higher tariffs and mass deportations, both of which could arguably reignite inflationary pressures. On the other hand, however, recent data in the labor market suggests that the pace of hiring slowed in the second half of last year, and the Bureau of Labor Statistics reports that more than 1.6 million jobless workers had been job hunting for at least six months, a 50% increase since the end of 2022. The Fed has also made clear that if the labor market softened further, they would arguably lean towards further rate cuts to support employment and not worry as much about inflation being 50 basis points or so above target. All told, the Fed’s official projections now pencil two 25 basis-point rate cuts in 2025, but the timing of those cuts—and whether they come at all—is far less clear.1
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Could Mortgage Rates See Some Relief in 2025? Would-be homebuyers were feeling hopeful last year when the Fed was telegraphing rate cuts and the 30-year fixed mortgage rate started marching from 7% to 6%. Then rates reversed course. Towards the end of 2024, long-term Treasury yields shot higher, ostensibly driven by market expectations for higher growth in the new year but also the potential for higher inflation and deficits tied to trade and fiscal policy. Mortgage rates tend to track long-duration Treasury bond yields (see chart below), which meant upward pressure was applied across the board.3
30-year Fixed Mortgage Rates (blue line) and 30-year U.S. Treasury Bond Yields (green line)
There are a few factors that could potentially bring down long-duration Treasury yields (and mortgage yields down with them). The first is better-than-expected inflation data in the coming months and quarters. The second is a clear end to the Fed’s rate cutting cycle, which could increase demand for longer-duration Treasuries since institutional buyers (banks, mutual funds, ETFs) would feel more confident about yield volatility subsiding. These two factors combined could also help close the gap between 30-year fixed mortgage rates and 30-year Treasury bond yields, which stood at approximately 1.4% as of the end of last year. This gap is unusually high relative to history (see chart above).
Layoffs are Low, But So is the Probability of Finding a New Job – As mentioned above in comments regarding the jobs market, many Americans are having a hard time finding work. According to the Bureau of Labor Statistics, of the 7 million unemployed Americans today, 1.6 million have been looking for a job for at least six months. While many types of jobs in services and healthcare remain relatively abundant, it is jobs in high-paying, white-collar roles like technology and law that are increasingly hard to come by. This trend may point to something of a plateau in labor market tightness, which may also signal an abating of wage pressures.5
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Disclosure
2 ZIM may amend or rescind the free guide offer, Using Market Volatility to Your Advantage, for any reason and at ZIM’s discretion
3 Wall Street Journal. January 8, 2025. https://www.wsj.com/finance/investing/the-hidden-force-that-can-bring-mortgage-rates-down-9639dd46?mod=djemMoneyBeat_us
4 Fred Economic Data. January 2, 2025. https://fred.stlouisfed.org/seriesBeta/MORTGAGE30US#
5 Wall Street Journal. January 5, 2025. https://www.wsj.com/economy/jobs/job-search-workers-unemployment-months-5a4cfcee?mod=economy_trendingnow_article_pos2
6 ZIM may amend or rescind the free guide offer, Using Market Volatility to Your Advantage, for any reason and at ZIM’s discretion
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