Employment data and mortgage rates are intimately connected. This is partially because the Federal Reserve must maintain conditions that favor as high a level of employment as possible but must also contain inflation. These are not compatible with each other.

The Federal Reserve and Discount Rates

Each month, the Bureau of Labor Statistics publishes an Employment Statistics Report which is avidly read by the markets and financial institutions. It is an extremely influential report since the ability of people to spend money or to invest is dependent on high employment and a strong labor market.

What this means that employment or jobs data will have a direct influence on whether or not the Federal Reserve lowers or increases interest (discount) rates. The more new jobs there are, then the more cash is available to Americans for spending – this leads to inflation, so the Fed increases the discount rate to counteract this.

Jobs and Mortgage Interest Rates

Mortgage interest rates are not set by the Federal Reserve.  The residential mortgage interest rate is determined by the market, and published by the Federal Home Loan Mortgage Corporation (Freddie Mac).  As employment increases, investors tend to draw away from mortgage backed securities and bonds and focus on the stock market.

The result is a reduction in the cash available for mortgages, which results in an increase in mortgage rates.  The reverse is also true: when employment falls, more cash is invested in mortgage backed securities, and the influx of cash drives mortgage rates down. This  connection between employment data and mortgage rates is why mortgages always seem more expensive at boom times, and cheaper when times are bad.

Employment Data and Mortgage Rates Summary

Overall, then, interest rates tend to rise with employment and drop or stabilize with falling employment. Mortgage rates tend to follow the general trend of discount rates, but not necessarily follow them exactly.  In that respect, the way that general interest or discount rates are affected by employment/jobs data differs from the way in which the affect residential mortgage rates.

The fundamental reasons are the same, although mechanisms differ. In one case the Fed adjusts rates to help prevent inflation created by rising employment and more money being spent. In the other case, market forces increase or reduce mortgage rates according to the cash available for mortgages generated by investments mortgage backed securities – these reduce as employment increases through stock markets becoming the better form of investment.

You can use this knowledge of the effect of employment data on mortgage rates by seeking a mortgage during a period of higher unemployment. Interest rates will generally tend to be lower.  Although employment data and mortgage rates are connected in this way, you should still consult a mortgage advisor for the best long-term deal and information on the best form of mortgage to take.