Everything suggests the Fed will ease its stance on inflation during its meeting this week, marking a shift from the battle ongoing for the past two and a half years.

Two and a half years ago, we saw record low unemployment, robust job growth, and a surplus of job openings compared to workers available. Now, unemployment aligns with its decade-long average, and job availability has decreased.

When Fed Chair Jerome Powell initiated the first 0.25% rate hike on March 16, 2022, he emphasized the phrase “price stability” 23 times, highlighting the Fed’s primary focus moving forward.

With inflation approaching the Fed’s ideal 2% target, Powell and his colleagues will shift their attention to maximizing employment during discussions this Tuesday and Wednesday. Here’s a look at the current economic landscape as the Fed approaches its next phase.

Will the Fed lower interest rates this week?

Traders dealing in short-term interest rate futures are generally betting on a rate cut. However, opinions vary on the extent of the reduction. As of Monday at 4 p.m. EDT, the CME FedWatch tool indicates a 37% likelihood of a 0.25 percentage point cut after this week’s meeting, while 63% expect a steeper reduction to the range of 4.75%-5%.

A considerable portion of interest-rate investors tracked by CME anticipate that within a year, the Fed’s short-term rates could drop by at least 2 percentage points, potentially providing further ease for buyers and sellers in the housing market. Mortgage rates, which tend to follow longer-term government bonds, have already begun to decline in anticipation of these cuts.

What are the current mortgage rates for home buyers?

In 2021, the average for a 30-year fixed-rate mortgage was around 3%. Those rates have now more than doubled, according to Freddie Mac. For example, a new $400,000 mortgage at 6.2% would require a monthly payment of $2,450 in principal and interest—an additional $764 compared to a 3% mortgage.

What the numbers indicate: Although 30-year mortgage rates have decreased to 6.2% since hitting a peak last October, they still remain significantly above the 10-year average of 3.95%, as shown by Freddie Mac’s weekly survey.

Rising mortgage rates have contributed to increased monthly costs for new buyers, and record-high home prices have compounded the issue. In July, the median price for existing homes increased by over 4% year-over-year, reaching $422,600, according to the National Association of Realtors.

Impact of higher mortgage rates on home sales

The majority of homes sold each month fall under the category of existing home sales. The NAR provides monthly reports on sales using a seasonally-adjusted annual rate. Home sales hit an all-time high in 2005 at 7.08 million units, but by 2023, this number fell to just 4.09 million units, lower than any year following the financial crisis. Over the past two months, the annualized rate has been just under 4 million homes.

How is the US economy performing?

The overall economy is still performing at a level that justifies the Fed’s strategy of maintaining elevated interest rates. In the second quarter, the U.S. economy produced goods worth $22.9 trillion on an inflation-adjusted annualized basis, according to the BLS. This marked a 3% increase in GDP from the previous quarter.

What the data reflects: The U.S. economy experienced unexpected robust growth in the second quarter, rebounding from a sluggish first quarter. Early speculations suggested high-interest rates were beginning to hinder businesses and consumer spending.

The Zeta Economic Index—a monthly compilation of data from 240 million consumers—indicated that the economic growth maintained its upward momentum, rising 0.6% from July to reach 67.4 in August. This index had previously dropped to 48.6 during the peak of annual inflation at 9.1% in June 2022.

This index encompasses several key indicators, most of which continue to trend positively. However, job market sentiment stands out as a concern, having decreased by 1% from July and nearly 5% from the previous year, representing a cautionary signal noted by the Fed.

During a recent speech in Jackson Hole, Powell remarked that “the risks to employment have increased” and that “it’s time for policy to adapt.”

The job market’s response to higher interest rates

Despite the rise in borrowing costs due to increased interest rates, businesses have continued to create new jobs. However, the pace of job growth has slowed in recent months, according to the Bureau of Labor Statistics. Additionally, the abundance of job openings that previously led to a trend of “quiet quitting” has diminished, suggesting that companies may not need to increase wages as aggressively to attract new talent, reducing inflation pressures.

“It appears unlikely that the labor market will contribute to elevated inflationary pressures shortly,” Powell stated. “We do not seek or anticipate further cooling in labor market conditions.”

While the unemployment rate has remained around its 10-year median of 4.2% since May, the number of new jobs added has consistently decreased each month. These downturns were further exacerbated when the BLS revised previous job growth estimates for May and June downward by a total of 86,000 jobs.

Fortunately for the Fed, inflation has dropped sufficiently, allowing it to shift focus towards employment.

What is Inflation?

Inflation refers to a persistent increase in prices across the economy, and it has been consistently above the 10-year average of 2.1% for over three years. Policymakers at the Federal Reserve emphasize the importance of maintaining a low and stable rate of inflation to enable better decisions related to saving, borrowing, and investing.

Current Data Insights: Although inflation has significantly decreased over the past two years, it still remains high, primarily due to the costs associated with housing. As of August, the annual inflation rate in the U.S., as calculated by the consumer price index, dropped to 2.5%, down from 2.9% in July. This figure marks the lowest rate since March 2021, a year prior to when the Fed began raising interest rates.