If you paid attention to the Federal Reserve’s monetary decisions last year, you might have been surprised by something: The central bank’s three interest rate cuts didn’t help mortgage rates get cheaper for homebuyers.
The Fed’s relationship to home loan rates isn’t direct or immediate. In many ways, what the Fed says matters more for the market than what it actually does. In other words, the Fed doesn’t control the mortgage market. Mortgage rates are volatile and more influenced by the bond market, investor expectations and other economic factors.Â
This week, at its first policy meeting of the year, the Fed announced a pause from its rate-cutting path. What does that mean for mortgage rates?
Following the meeting, Fed Chair Jerome Powell indicated that slow progress on inflation and uncertainty surrounding new economic policies are putting the central bank in monitor mode. “We do not need to be in a hurry to adjust our policy stance,” Powell said.
If inflation remains sticky, the central bank’s pause on rate cuts could last several months, keeping upward pressure on bond yields and mortgage rates. Here’s what to know about how the government’s interest rate policy affects mortgage rates.
What is the Federal Reserve’s relationship to mortgages?
The Fed, established by the 1913 Federal Reserve Act, sets and oversees US monetary policy to stabilize the economy. It consists of 12 regional banks and 24 branches, and it is run by a board of governors who are voting members of the Federal Open Market Committee.
The FOMC sets its benchmark federal funds rate, the rate at which banks borrow and lend their money. In an inflationary environment, the Fed raises interest rates to slow economic growth and make borrowing money more cost-prohibitive. When the economy is in a slump or downturn, the Fed reduces interest rates to stimulate consumer spending and propel growth.
Though the Fed doesn’t directly set mortgage rates, it influences them by altering the price of credit, which has a domino effect on mortgage rates and the broader housing market over the long term. For instance, banks typically pass along the Fed’s rate hikes to consumers in the form of higher interest rates for longer-term loans, including home loans.
Read more: Why Labor Data Matters for Mortgage Rates and the Fed
What is the outlook for Fed rate cuts and mortgage rates?
Since the November election, investors have been “pricing in” expectations for higher inflation and fewer Fed cuts in 2025, effectively driving up bond yields and mortgage rates. President Donald Trump’s proposals for tariffs, tax cuts and mass deportations are widely considered inflationary, which isn’t good for mortgage rates.
Economists say it’s too early to say how Trump’s economic agenda and a Republican-led Congress might alter the central bank’s approach to interest rate adjustments, noting only that the Fed plans to move cautiously.
“It’s a bit of a ‘wait-and-see’ period with regard to the new administration, and a lot may happen over the first 100 days of it, given the flurry of executive orders,” said Keith Gumbinger, vice president of HSH.com.
Right now, the Fed hasn’t changed its outlook for two 0.25% reductions in 2025. Other organizations, including the Mortgage Bankers Association, forecast just one interest rate cut.
“With the Fed on hold, we do expect that longer-term rates, including mortgage rates, will also stay within a narrow range for the foreseeable future, said Mike Fratantoni, chief economist at MBA, in a statement this week.
If the Fed implements additional rate cuts or even simply signals that it plans to in the near future, though, mortgage rates could gradually decline. The timing of potential cuts, as well as the economic data we get between each policy meeting, will determine how quickly (and how far) mortgage rates can fall.
The Fed “will want to see the impact of President Trump’s tariffs and other policies on inflation,” said Melissa Cohn, regional vice president at William Raveis Mortgage. The earliest she thinks the central bank will consider cutting rates again would be at their May policy meeting.
A cut in June or July is more likely, based on the CME FedWatch Tool. Absent a significant downshift in inflation or a jump in unemployment, it’s unlikely 30-year fixed mortgage rates will drop below 6% any time soon.
What kind of economic factors affect mortgage rates?
Mortgage rates move around for many of the same reasons home prices do: supply, demand, inflation and even the employment rate. Additionally, the individual mortgage rate you qualify for is determined by personal factors, such as your credit score and loan amount.
Economic factors that impact mortgage rates
- Policy changes:Â When the Fed adjusts the federal funds rate, it spills over into many aspects of the economy, including mortgage rates. The federal funds rate affects how much it costs banks to borrow money, which in turn affects what banks charge consumers to make a profit.
- Inflation changes: Generally, when inflation is high, mortgage rates tend to be high. Because inflation chips away at purchasing power, lenders set higher interest rates on loans to make up for that loss and ensure a profit.
- Supply and demand:Â When demand for mortgages is high, lenders tend to raise interest rates. The reason is because lenders have only so much capital to lend out in the form of home loans. Conversely, when demand for mortgages is low, lenders slash interest rates to attract borrowers.
- Bond market activity:Â Mortgage lenders peg fixed interest rates, like fixed-rate mortgages, to bond rates. Mortgage bonds, also called mortgage-backed securities, are bundles of mortgages sold to investors and are closely tied to the 10-year Treasury. When bond interest rates are high, the bond has less value on the market where investors buy and sell securities, causing mortgage interest rates to go up.
- Other key indicators: Employment patterns and other aspects of the economy that affect investor confidence and consumer spending and borrowing also influence mortgage rates. For instance, a strong jobs report and a robust economy could indicate greater demand for housing, which can put upward pressure on mortgage rates. When the economy slows and unemployment is high, mortgage rates tend to be lower.
Personal factors that impact mortgage rates
The specific factors that determine your particular mortgage interest rate include:
Is now a good time to shop around for a mortgage?
Even though timing is everything in the mortgage market, you can’t control what the Fed does.
You can get the best rates and terms available by making sure your financial profile is healthy while comparing terms and rates from multiple lenders. Regardless of the economy, the most important thing when shopping for a mortgage is to make sure you can comfortably afford your monthly payments.
“Buying a home is the largest financial decision a person will make,” said Odeta Kushi, deputy chief economist at First American Financial Corporation. If you’ve found a home that fits your lifestyle needs and budget, purchasing a home in today’s housing market could be financially prudent, Kushi noted.
If you’re priced out, it’s better to wait. “Sitting on the sidelines may allow a potential buyer to continue to pay down their debt, build up their credit and save for the down payment and closing costs,” she said.
The bottom line on where mortgage rates are headed
The Federal Reserve held interest rates steady in January, but it’s not uncommon for the federal funds rate and mortgage rates to move in different directions for some time. Mortgage rates will continue fluctuating in response to inflation, investor expectations and the broader economic outlook. Experts predict that mortgage rates should go down slowly over the next year.
If you’re shopping for a mortgage, compare the rates and terms offered by banks and lenders. The more lenders you interview, the better your chances of securing a lower mortgage rate.
More homebuying advice
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