Market Update: What’s Driving Rates Right Now

The latest round of economic data reinforces a theme we’ve been seeing for some time. Inflation has cooled from its peak but remains above the Federal Reserve’s 2% target. Meanwhile, the unemployment rate remains historically low, even as employers appear hesitant to expand hiring. Together, these conditions have placed the Fed firmly in a cautious, wait-and-see posture.

Let’s break down what’s happening and what it could mean going forward.

The Economic Backdrop

Inflation remains stable in the high-2% range.

While that’s not the Fed’s goal, it represents meaningful progress compared to prior years. If inflation were being graded, it would probably earn a respectable “B+.”

On the labor side, unemployment sits around 4.4%, which is strong by nearly any historical standard. The challenge isn’t widespread layoffs. Instead, employers are simply not hiring aggressively.

This slower hiring trend is drawing increased attention from policymakers and has become a key factor in recent Fed decisions.

As a result, the Fed has shifted more focus toward supporting employment while continuing to monitor inflation.

What Rate Cuts Do, and Don’t, Mean

The Fed reduced short-term interest rates twice in 2025, and projections currently call for one or two additional cuts in 2026. It’s important to understand what those cuts actually influence.

The Federal Reserve directly controls very short-term rates that banks charge each other. Those decisions ripple into products like savings accounts, auto loans, and credit cards. Mortgage rates, however, tend to track longer-term indicators, particularly the 10-year Treasury.

That’s why mortgage rates don’t always fall when the Fed cuts rates.

In fact, despite multiple Fed cuts since late 2024, average 30-year fixed mortgage rates today are very close to where they were before those cuts began.

The takeaway is simple. Rate cuts can help, but they are not a guarantee of lower mortgage rates.

What’s Changed: Fannie Mae and Freddie Mac Activity

Recent headlines have focused on increased mortgage-backed securities purchases by Fannie Mae and Freddie Mac under the oversight of their conservator. Historically, these organizations played a stabilizing role in the mortgage market by buying securities when spreads widened and selling when markets tightened.

Following the financial crisis, their ability to do this was limited. Today, however, they have room to expand their portfolios, and they have already been doing so quietly.

These purchases can help narrow the gap between mortgage rates and Treasury yields.

Over time, this could result in modest improvements, potentially around one-eighth of a percent. Helpful, yes. Transformational, no.

Weekend Developments at the Federal Reserve

Another headline drawing attention involves the Federal Reserve itself, including an investigation related to Chair Jay Powell. While the situation has generated headlines, financial markets have so far reacted calmly.

Bond yields moved only slightly, and equity markets showed limited volatility.

The Federal Reserve is designed to operate independently of political pressure, and markets generally expect that framework to remain intact. For now, these developments appear unlikely to materially change the Fed’s policy path in the near term.

What Comes Next?

The broader theme for 2026 remains continuity rather than disruption. Economic growth is steady but slower. Inflation is easing but not eliminated.

Hiring is stable but cautious. Policymakers continue to balance competing priorities.

While headlines may come quickly, markets appear increasingly accustomed to them. For borrowers, homeowners, and real estate professionals alike, the most important approach remains staying informed and focusing on long-term strategy rather than short-term noise.

As always, we’re here as a resource. If you have questions about how today’s environment could affect your plans, don’t hesitate to reach out to one of our Loan Officers or through our contact form.