The Federal Reserve Board of Governors will announce the outcome of the January board meeting Jan. 29, and experts believe it may adjust its interest rate strategy.
2025 was initially expected to be a year of consistent interest rate cuts, but lingering unknowns about the U.S. economy will likely pause rate cuts, at least in the short term.
Inflation has been inching toward 3% — a whole percentage point higher than the Fed’s 2024 year-end goal — and recent executive orders from the new Trump administration could increase inflation even further.
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When the Fed cut interest rates by 0.5% in September, experts predicted that mortgage rates would dip below 6% by 2025. However, due to continued political and economic uncertainty, mortgages have been trending near 7% for the past several months.
Experts have updated projections for mortgage rates this year based on what will likely be an unpredictable year for interest rate cuts.
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Mortgage rates will slowly come down, contingent on inflation
Fed chair Jerome Powell revealed that the central bank will “move cautiously” after that last interest rate cut in December. Powell noted that decisions would not be made based on Trump’s proposed policies before he took office, but his recent slew of executive orders may require the Fed to recalibrate.
Since the Fed is likely to pause rate cuts and hold the federal funds rate target between 4.25% and 4.5%, mortgage rate forecasts will likely be unchanged.
Greg McBride, Chief Financial Analyst at Bankrate, predicts more of the same in 2025.
“In 2025, the average 30-year fixed mortgage rate will spend most of the year in the 6’s, with a short-lived spike above 7%, but never getting below 6%,” he said in a statement to TheStreet. “Continued economic growth and worries about inflation and government debt will keep mortgage rates elevated.”
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The 10-year treasury yield, a key factor in mortgage rates, may be a better indicator than the federal funds rate. Lenders typically set mortgage rates within two or three percentage points of the 10-year treasury yield to link rates to mortgage-backed securities.
McBride explains why home buyers should focus more on the treasury yield than the Fed’s rate cuts — or lack thereof.
“After jumping more than a full percentage point since September, long-term Treasury yields have eased a bit over the last 10 days,” he explained. “But mortgage rates remain above 7 percent, a further headwind to affordability and keeping home sales on ice.”
“Prospective homebuyers should keep an eye on inflation, more so than the Fed, as a decline in inflation is a necessary precursor to Treasury yields and mortgage rates moving lower.”
Inflationary policies are top of mind for the Fed and consumers
As mortgage rates inch toward 7%, inflation has steadily edged toward 3%, up from 2.4% in September. Inflationary increases are expected to be modest this year, but if controversial Trump policies cause consumer prices to surge, future rate hikes may not be out of the question.
The Fed has publicly declared its commitment to curbing inflation, which will likely be the most significant factor in how much interest rates are this year, if at all.
Related: Fed chair Jerome Powell issues warning on inflation, weak housing market
Even before potential trade wars with Canada, Mexico, Colombia, and China, economists noted that Trump’s campaign proposals could significantly raise inflation.
Now that mass deportations have begun under the new administration, bird flu is spreading across the country, and looming 25% tariffs against Mexico threaten the U.S. agricultural supply, consumer prices are likely to rise.
As inflation rises, housing prices tend to increase, creating an even more challenging housing market for buyers. 38% of Americans are concerned about inflation rising in 2025, and 37% are worried a recession is imminent.
Moderating inflation is the key to quelling financial strain on consumers, leading to lower interest rates, increased housing market activity, and greater economic growth.
The Fed and home buyers will need to monitor how inflation changes throughout the year to gain more clarity on the future of mortgage rates.
Related: Veteran fund manager issues dire S&P 500 warning for 2025
