For mortgage rates, it’s not labor over inflation anymore

With all the crazy headlines that push oil prices up and down, we sometimes forget that the labor data is still really important for mortgage rates — and that the Fed’s view of labor data is just as important as getting a deal with Iran to bring oil prices lower. 

So the question is, where are we today? Since it’s jobs week, let’s take a review of where the Fed’s mindset is with labor versus inflation.

Federal Reserve and mortgage rates

Today, Cleveland Fed President Beth Hammack said this: “If we wait for definitive evidence that high inflation has become embedded in the economy, it may require larger policy adjustments, at greater cost.” 

There are a lot of hawks in the Fed right now, and the markets went from pricing in two to three rate cuts in 2026 to a rate hike in a short amount of time. The question is, will they pull the trigger in 2026?

Kevin Warsh was brought in to cut rates, not raise them, but his hands are tied as long as this conflict continues and oil prices are elevated. It’s not shocking that the 10-year yield and mortgage rates made a big reversal as the conflict expanded. A lot has been priced into the market without the Fed actually hiking rates.

As of now, the 10-year yield and mortgage rates are pricing in a rate hike in 2026, not two to three rate cuts.

Jobs and the labor data

As we wait for Jobs Friday, the one thing that has happened in 2026 is that I believe the labor data is beating the Federal Reserve estimates. To me, this means job growth is running about 46,000 jobs per month above the Federal Reserve’s break-even point, so the Federal Reserve isn’t worried about the labor market breaking anymore.

Today, one of the Federal Reserve’s main labor data points, job openings, had a massive beat of estimates, even though the internals of the report with hires weren’t great. Job openings are above 7.5 million, which again shows that the fear of a huge rise in the unemployment rate from AI disruption isn’t happening.

Oil prices

As we attempt to get a deal with Iran, the bond market feels better about that really happening. However, oil prices are still elevated and are nowhere close to the lows of around $56. As long as oil prices are elevated, the Fed hawks will not be talking about rate cuts, but more about rate hikes. We need ships flowing in the Strait for this to get better.

We have to remember that inflation was rising before the conflict happened, and this conflict just gave the Fed hawks meat to talk about rate hikes.

Conclusion

As we wait for Jobs Friday and the jobless claims data we get every Thursday, remember that when we are talking about mortgage rates, it’s no longer labor over inflation like it was last year. The jobs data has improved, but the inflation story has gotten more complicated with elevated oil prices as well. We need to keep a close eye on what Fed governors say because a lot has been priced in, but any improvement in inflation data and the economic data being softer can take the 10-year yield lower.