As the White House pushes for rate cuts, economists debate what the Fed will do next
Mortgage rates dipped into the high fives briefly in early 2026, giving the market a taste of what lower borrowing costs might feel like. Since then, they have drifted back toward the high sixes, and the window that opened has largely closed. The question now is whether another one is coming.
The data released this morning from the Bureau of Labor Statistics showed 172,000 jobs added in May and an unemployment rate holding steady at 4.3%. A resilient labor market gives the Fed little reason to move toward cuts, and with inflation still running hot, the pressure to hold or even raise rates is building.
There has been significant debate about what the Federal Reserve is going to do both at their next meeting on June 16-17, and for the rest of the year. What happens over the rest of the year could reverse what has long been predicted for 2026: that mortgage rates would continue to decline.
Rate volatility has made things challenging for brokers who have spent much of the last year telling clients rates were heading lower. And while many brokers have pivoted their messaging, Selma Hepp (pictured top), chief economist at Cotality, recently received an unsolicited message from a lender saying mortgage rates were falling. She found that message immediately off-putting and believes the best of rates for 2026 may be behind us.
"That just turned me off," Hepp told Mortgage Professional America. "If I were a consumer, and consumers are very educated these days because all they have to do is put it in Google and get what's going on, that would turn me off. You've got to be honest with people. You can't pretend something is happening when it's not. Maybe we’ve seen the best of rates for this year, and so we’ll have to wait for it to come around again."
How brokers can navigate volatility
The confirmation of Kevin Warsh as Fed chair has added a new element to the equation. Hepp said markets view him as a productivity optimist, which would normally support lower rates. But high energy prices driving higher inflation could make that difficult.
“The Fed has been dissecting inflation metrics for years,” Hepp said. “In the end, if you have inflation, it’s hard to do anything. And I think everything is pointing to accelerating inflation again, especially if we see no changes in the (Iran) conflict.”
A potential shift away from forward guidance could complicate things further. The Fed's practice of signaling its intentions in advance has been useful to markets even when imperfect, and Hepp said losing it could add volatility on top of everything else.
"Marketwise, the confusion stays," she said. "I think what contributes is if you really do have a lack of communication or lack of forward guidance, I think that may confuse the markets more. Everybody expects more volatility as a result."
Because there is more volatility forecasted, Hepp thinks the current messaging should focus on a rate range for the rest of 2026.
"Instead of providing an expectation of lower rates, provide an expectation of range," Hepp said. "Tell them, ‘If we're in this range and we lock in at any point within this range, can you as a consumer afford this?’ Instead of just saying, ‘Hey, you can refi down the road.’ If you say, 'Hey, there is a possibility of moments of opportunity, let's get ready for it.’ That's the honest conversation."
Fed rate cut or rate hike?
The debate over what the Fed should do next has ramped up since Warsh's confirmation. The White House has been vocal about wanting rate cuts, and part of the expectation around Warsh is that he will be more receptive to that pressure than former chair Jerome Powell was. The May jobs report released this morning has added fresh ammunition to both sides of that argument.
Kevin Hassett, director of the White House National Economic Council, pushed back on rate hike fears in an appearance Friday on CNBC's Squawk Box.
"I don't think it's a classic Phillips Curve, 'Here goes inflation, it's going to take off' type of jobs market," Hassett said. "It's a supply-side driven job market. That means the Fed can watch the inflation numbers and wait a while before it does anything about it. This is the kind of story that suggests that the Fed shouldn't hike rates. It will have room as it watches the numbers to cut rates."
Sam Williamson, senior economist at First American, offered a more measured read of the same data.
"That broadening complicates the Federal Reserve's policy path heading into the June FOMC meeting," Williamson said. "As the final jobs report before the meeting, the May data could carry extra weight in shaping the Fed's tone. Stronger payroll growth, positive revisions, steady wages, and broader hiring give policymakers less reason to signal labor-market support, especially with renewed inflation pressure from higher oil and energy prices still in view. The result could be a shift away from a dovish bias and toward a more neutral stance."
Mike Fratantoni, SVP and chief economist at the Mortgage Bankers Association, took the harder line.
"While the job market is not showing broad-based strength, overall, there is surprising resilience," Fratantoni said. "Meanwhile, inflation is too high. MBA continues to anticipate that the Fed's next move will be a rate hike, and that means mortgage rates are unlikely to drop anytime soon."
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