The U.S. jobs report for September is set to be released Friday, and it could prove to be a pivotal moment for the Federal Reserve as it determines how to shape monetary policy moving forward.

The past three months have included underwhelming data in the labor market. In August, nonfarm payrolls expanded by 142,000 positions — below the Dow Jones consensus forecast of 161,000. Meanwhile, job gains for June and July were revised downward to 118,000 and 89,000, respectively.

The consensus estimate for September is 150,000 new jobs created, up 5.6% from the preliminary August numbers. A figure that exceeds this estimate could signal temporary strengthening of the labor market and cause Fed policymakers to more carefully contemplate future interest rate cuts following last month’s 50-basis-point (bps) decrease.

Conversely, an exceptionally weak print that includes a higher unemployment rate could cause the Fed to move more rapidly in lowering the federal funds rate. Benchmark rates currently sit at a range of 4.75% to 5%, and barring an emergency session, they won’t move again until the next regular meeting of the Federal Open Market Committee (FOMC) in early November.

What does this mean for mortgage rates? According to Joe Ellison, vice president of capital markets at Veterans United Home Loans, it’s important to not have tunnel vision as rates are unlikely to drop much in the short term.

“While the size of the Fed’s cut (in September) was the big headline, the real focus should be on the long-term rate path,” Ellison said in a statement. “Right now, the data dependency of the Fed is the key driver of mortgage rates. As the labor market weakens, we may see more rate cuts this year and next, which could eventually bring down mortgage costs.”

After months of consistent declines, mortgage rates have stagnated since the Fed’s decision. While the 50-bps cut was welcomed, lenders and investors had already priced it into the cost of loans. On Tuesday, HousingWire‘s Mortgage Rates Center showed that 30-year fixed rates for conforming loans averaged 6.25%, exactly the same as a week ago, while the 15-year conforming average of 5.59% had barely budged.

Ellison explained that a variety of economic data, interest rate spreads and the bond market will influence the direction of mortgage rates in both the short and long term. The spread between the 30-year mortgage rate and the 10-year Treasury yield continues to narrow, but as HousingWire Lead Analyst Logan Mohtashami noted this week, “we still have some runway left to return to historical norms.” 

Ellison said that bond market liquidity has been low for more than two years, which has driven mortgage spreads higher. But more buyers have returned to the mortgage-backed securities (MBS) market of late, sparking more options from sellers. If this activity continues, it could offset the MBS tapering by the Fed and make mortgages more affordable.

In a speech given Monday in Nashville, Fed Chair Jerome Powell said that policymakers have “growing confidence” that their decisions are leading to better outcomes in the Fed’s dual mandate of maximum employment and stable consumer prices.

“Looking forward, if the economy evolves broadly as expected, policy will move over time toward a more neutral stance,” Powell said. “But we are not on any preset course. The risks are two-sided, and we will continue to make our decisions meeting by meeting.

“As we consider additional policy adjustments, we will carefully assess incoming data, the evolving outlook, and the balance of risks. Overall, the economy is in solid shape; we intend to use our tools to keep it there.”

With demand for refinances recently moving to its highest level in nearly two years, according to Optimal Blue data, more lenders are likely to shift their lead-generation and recapture strategies in this direction. One example is United Wholesale Mortgage (UWM), which recently announced that it would use artificial intelligence to send pre-validated refi offers to customers.

“Right now, 30-year fixed rates are in the 5s for consumers,” UWM president and CEO Mat Ishbia said in a YouTube post on Tuesday. “The opportunity is there right now and we expect the Fed to cut rates even more. How much more will rates drop? I don’t know, but rates don’t need to go much further. Refis are here and the refi boom is coming. The next 15 months for the mortgage industry look very, very promising.”