Mortgage interest rates have already moved significantly lower over the past several weeks. Where they move from here will be determined by many factors – not the least of which is the next jobs report to be released next week. After the weaker report for the month of July another tepid or even moderate job report for August would just about clinch a rate decrease by the Federal Reserve when they meet in mid- September.

Wait? The Fed has not already lowered interest rates? Then how come mortgage rates are going down already? This is just a reminder that the Federal Reserve directly controls short-term rates. The Federal Funds Rate is the rate banks charge each other for short-term lending. How short-term? Literally, overnight. Banks are constantly getting deposits and making loans, and they are required to keep a certain reserve requirement each day. Therefore, if they are short of this requirement, they may have to add reserves overnight. When the Fed changes the Federal Funds rate, certain short-term rates move automatically, for example the prime lending rate.

Long-term rates are indirectly affected by the movements of the Fed. However, the bond market trades every day just like the stock market. Thus, while they are influenced by the Fed’s moves—long-term rates can move in anticipation of Fed activity. For example, when the last jobs report was released, long-term rates such as mortgage rates moved down immediately. Yet, short-term rates such as the three-month Treasury did not move nearly as much. Thus, if we have a weaker jobs report for August, mortgage rates may move down again. But don’t expect rates to move down when the Fed lowers their Federal Funds rates because the markets would have already anticipated that move. That is, unless the Fed surprises the market and makes a bigger move than expected — such as 0.5 percent decrease instead of .25 percent.