Federal Reserve officials have a clearer path to pause rate hikes following a soft jobs report that missed expectations. The latest data shows the U.S. economy added only 29,000 jobs in September, far below the 84,000 forecast, while the unemployment rate rose to 4.2%.
Data shows cooling labor market
Wage growth slowed to its lowest point since May 2021, rising just 3% year-over-year. This pace is currently tracking below inflation, which was 3.4% in August. The Bureau of Labor Statistics reported the labor market remains in a low-hire, low-fire pattern that has persisted throughout 2026.
Lawrence Yun, chief economist at the National Association of Realtors, said the data suggests the economy is neither overheating nor approaching a recession. Yun noted that the job market will not exert upward inflationary pressure and that oil prices have retreated somewhat, which may allow mortgage rates to see slight relief after brutal rises over the past month.
The softer jobs report provides the Federal Reserve with room to pause, though investors still widely expect another rate increase before the end of the year. CME Group’s FedWatch tool shows the probability of a hike at the October meeting dropped to 21.6% from 64.2% a week earlier.
Mortgage rates remain volatile
The September jobs report briefly pushed mortgage rates lower, with the 30-year fixed-rate mortgage falling to 7.49% on Friday morning. The rate had climbed to 7.6% earlier in the week before dipping again. It quickly bounced back up to 7.57% by afternoon.
Despite the initial drop, mortgage rates are unlikely to stabilize soon. Inflation and the impact of the ongoing U.S.-Iran war on energy prices are keeping 10-year Treasury yields rising. If bond yields continue to climb, mortgage rates are expected to follow suit.
A weaker job market generally cools inflation, but it comes with a tradeoff. Fewer job changes and wage boosts could also hurt the market. Sam Williamson, senior economist at First American, noted that a weak labor market means fewer job changes, raises, and relocations. However, lower mortgage rates could help buyers hold onto more of those affordability gains. This may be enough to keep a floor under housing activity, even if the weaker hiring backdrop leaves little room for a meaningful rebound. The data shift signals a cooling labor market that supports the Federal Reserve’s potential pause, though market participants anticipate continued rate increases through year-end as inflation pressures persist.
