(Reuters) - The interest rate for the most popular U.S. home loan plunged last week to its lowest level in 15 months, after the Federal Reserve signaled it could start cutting its policy rate in September, and a downshift in the job market bolstered financial market bets the cuts would be big.

The average contract rate on a 30-year fixed-rate mortgage dropped 27 basis points in the week ended Aug. 2, to 6.55%, the Mortgage Bankers Association said on Wednesday. That was the lowest rate since May 2023, and the sharpest drop in two years.

The decline gives potential homebuyers some long-hoped-for relief in what has become an increasingly unaffordable housing market in recent years, as home prices and borrowing costs both rose.

It also gives some who bought homes when rates were higher the option to refinance and reduce payments. The MBA 30-year average rate topped out at 7.9% last October.

Refinancing applications rose sharply to the highest level in two years, the MBA said on Wednesday. But purchase activity edged up less than 1%, constrained by the low inventory of homes for sale that has pushed up prices.

The Fed, whose aggressive inflation-fighting rate-hike campaign in 2022 and 2023 drove borrowing costs to their highest levels in decades, signaled last week that cooling price pressures and a slowing labor market mean a policy rate cut could be on the table as soon as next month. The U.S. central bank has kept the policy rate in the 5.25%-5.50% range for more than a year.

Two days after the Fed's last policy meeting, the Labor Department's monthly jobs report showed that the U.S. unemployment rate had jumped to 4.3% in July and that hiring had slowed, raising fears a recession is imminent or perhaps even underway.

Th fears set off a slide in equities that reverberated in global markets into Monday, before stocks recovered somewhat on Tuesday.

The news also triggered a rally in U.S. Treasuries, sending down their yields -- which move inversely to bond prices -- and pulling closely linked mortgage rates down along with them, a silver lining for millions of U.S. households on the hunt for new homes, cheaper housing costs, or both.

While the Fed left rates steady at its July meeting, its post-meeting policy statement showed that it was now just as focused on the health of the labor market as on bringing down inflation.

That shift in communication, San Francisco Fed President Mary Daly said on Monday, has translated to lower mortgage rates as investors anticipate the central bank's next move.

"You already see policy working, even before we cut the rate," she said.

Interest-rate futures now reflect bets the Fed will cut rates by a total of a full percentage point by the end of this year, starting with a reduction of half a percentage point next month.

More than 4 million mortgages are at interest rates of 6.5% or higher, according to Intercontinental Exchange's ICE Mortgage Monitor.

But more than six in 10 mortgages have rates below 4%, FreddieMac data shows. That suggests that for a large fraction of homeowners mortgage rates would need to drop far more to make the cost of refinancing worthwhile, or to entice them to buy a new home and put their current one on the market.