August 25, 2025
Judging by the jobs numbers for the past three months, the markets are calling for a rate decrease by the Federal Reserve at their next meeting in the middle of next month. Certainly, long-term rates have been falling as a reaction to the weakening job situation and in anticipation of the Fed’s next move. When the economy adds fewer jobs, consumers spend less and wage growth eases, which means that inflation should ease at the same time. This should give the Fed more wiggle room to ease interest rates.
The one wild card is the implementation of significant tariffs. For example, the National Association of Home Builders has indicated that higher tariffs on Canadian lumber is likely to raise the cost of a new home. Higher costs are directly translated into higher inflation. Is it possible to have rising inflation at the same time that the economy slows down? The answer is yes, and this condition is called “stagflation.” It is not very common in our history.
If the Federal Reserve lowers interest rates while inflation is rising, then long-term interest rates such as mortgage rates are not likely to ease as much – if at all. Keep in mind that the effect of the implementation of tariffs upon inflation is not a certainty. There are plenty of other intervening factors. But the threat of stagflation is one that the Fed will keep their eye on. Generally, a slower growth economy should be good news for interest rates as long as we don’t have stagflation and/or fall into a recession. Thus, let’s hope for a healthy balance of slow growth and lower interest rates.
Source: Origination Pro
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