While jobs and inflation draw the headlines, an economist discusses a third factor at play
As the calendar flips to October, the next meeting of the Federal Reserve’s Federal Open Market Committee (FOMC) is less than a month away. On October 29, the FOMC will announce its next rate decision, and based on the comments of Fed governors over the last week, the path forward is far from clear.
Almost all of the comments you hear from Fed members revolve around the two mandates the central bank is trying to protect. The goals are to bring the country as close to full employment as possible and keep inflation as low as possible.
These two mandates are what make the Fed’s job very difficult right now. While the pressure is on from the Trump administration to lower interest rates, the central bank must also avoid actions that could cause inflation to increase rapidly.
Selma Hepp (pictured top), chief economist at Cotality, said it comes back to those two mandates for the Federal Reserve when considering future rate movement.
“In the narrative that they are telling us, whenever you listen to the press conference, whenever there's a question around anything else, it always comes back to ‘Our mandates are these two things, and that's what we're sticking to,’” Hepp told Mortgage Professional America. “I really do think for them, that's what it's going to be, because the two are going to be reflections of what's happening in the economy.”
K-shaped economy
A term that may be unfamiliar to some in the mortgage industry, but is being discussed more frequently in relation to the current economic climate, is the concept of a K-shaped economy.
The concept involves different segments of people moving in opposite directions, resulting in a “K” shape. Hepp said that while the concept isn’t directly discussed in the two mandates, it is something that she believes the Fed is keeping an eye on.
“One thing that is not part of the mandate, but I do think they are very concerned with, is this K-shaped economy,” Hepp said. “The fact that lower-income households, or the lower third of household income distribution, are not doing as well as the highest income group. The fact that they haven't been doing well at all is due to inflation eating into their incomes.”
This concept is why Hepp expects that you will continue to hear Fed governors talk about the fear of inflation getting out of control. The last thing the central bank wants is a return to 80s-era inflation, which required very high interest rates to get under control.
“I think that there's still so much stock in the inflation expectations and fears,” she said. “Maybe there is a fear of repeating the 80s situation and the Paul Volcker era. It’s all on their mind. When you really think about inflation, it hasn't been an issue for over 20 years, in the very least. It's a very unique time.”
Affordability challenges
Inflation concerns become affordability challenges for first-time homebuyers and those in lower-income areas. Hepp believes that is also a factor that Fed chair Jerome Powell and others on the FOMC are keeping in mind.
“I think this chair is also very concerned about equity,” she said. “I think that's why, to him, watching what's happening in that lower third, even the median income, because when you look at retail spending, consumer spending, consumer sentiment, it's all destroying the same medium to lower income folks. They are just not doing so well right now. And they feel like they're not moving forward in life. That lack of hopefulness can be very detrimental to the economy.”
Andrew Kunisawa of Accelerated Lending Group advises clients to focus on an affordable loan payment & avoid "doom and gloom" headlines. He says advising clients not to take a loan is key to long-term trust.https://t.co/F90D0kEnKk#Mortgage #FinancialAdvice
— Mortgage Professional America Magazine (@MPAMagazineUS) September 29, 2025
It has been a challenging year for both the Federal Reserve and top economists to determine the direction of the economy, in part due to the implementation, removal, and fluctuation of tariffs. Hepp said that despite the challenges, some positive signs are starting to appear.
“One thing that has been consistent is volatility,” she said. “But the other thing that has been consistent is that there is this very painfully slow but persistent decline in rates. I feel that maybe the worst is behind us. I may change my mind tomorrow, but the worst may be behind us.
“There is some thawing out in the housing market, which is definitely giving me hope for more turnover, more velocity in the housing market. That can help people not feel stuck in whatever situation they're in.”
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