- Mortgage rates may not drop as much in 2025 now that the Fed expects fewer rate cuts this year.
- The Fed slows inflation by raising the federal funds rate, which can indirectly impact mortgages.
- If investors believe the Fed may cut rates and inflation is decelerating, mortgage rates will typically trend down.
At its last meeting in December, the Federal Reserve announced that it decided to lower its benchmark rate by 25 basis points, following a 50-basis-point cut in September and a 25-basis-point cut in November. But at its January meeting, which wraps up on Wednesday, the Fed is expected to leave rates unchanged.
The central bank has penciled in just two cuts this year, with the first one expected to come by June, according to CME FedWatch. As the Fed lowers rates, mortgage rates may ease a bit.
But if inflation doesn't come down further, we might not get as many Fed cuts as expected. This would likely keep mortgage rates elevated.
Understanding the Federal Reserve's role in mortgage rates
The Federal Reserve's actions are a big influencer in where mortgage rates head. Here's what to know about this bank and how it plays into rates.
What is the Federal Reserve?
The Fed has two main jobs, called its "dual mandate": maintain price stability and keep unemployment low.
When the economy heats up too much, prices tend to grow faster than is healthy. When this happens, the Fed uses monetary policy tools that put downward pressure on inflation. Its primary tool for slowing inflation is the federal funds rate, which is the interest rate banks charge each other to borrow money overnight. Increasing this rate slows economic growth.
When the economy has slowed too much and needs a boost, the Fed will cut the federal funds rate to make it cheaper for banks to borrow money. During the COVID-19 pandemic, the Fed reduced rates to near zero to stimulate a struggling economy.
How Fed meetings affect mortgage rates
When the Fed decides to make changes to its benchmark rate, called the federal funds rate, it can indirectly impact the kinds of rates you're offered by mortgage lenders. This will, in turn, impact how much you pay each month for a home.
Mortgage rates don't directly follow the federal funds rate. Instead, they typically move up and down with the 10-year Treasury yield, because mortgage rates are largely impacted by investor demand.
"Fixed mortgage rates are typically set based on the yield of the 10-year Treasury bond," says Michael Gifford, CEO and co-founder of Splitero, a home equity investment company. "This bond is usually the most closely monitored by investors. As the Federal Reserve raises short-term interest rates, the yield on the 10-year Treasury bond also tends to rise. This puts upward pressure on mortgage rates. The Fed's rate hikes can also signal to lenders that inflationary pressures may be increasing, which can lead lenders to raise their interest rates in response, including mortgage rates."
To be clear: Your own personal mortgage rate will depend a lot on the circumstances of your financial profile: your credit score, debt-to-income ratio, and how much you have for a down payment. But larger rate trends in the mortgage market can be impacted by a lot of different factors, including current economic conditions, inflation, the unemployment rate, and the housing market.
Recent trends in mortgage rates after Fed meetings
To see how the Fed's actions impact mortgage rates, you can look at past rate changes. See below for recent mortgage rate trends after Fed meetings:
Historical Fed meetings and mortgage rates
The Fed began raising interest rates in early 2022, in an attempt to cool high inflation. It raised rates seven times in 2022 and four times in 2023. The Fed rate was then kept steady until September 2024.
As the Fed began raising rates, mortgage rates climbed steadily. In March 2022, before the first rate increase, the average 30-year mortgage rate was under 4%. For most of 2024, it hovered between 6% and 8%.
Recent changes and trends
The Fed spent most of 2022 aggressively raising rates to try to tame decades-high inflation. In response, the consumer price index, a major measure of inflation, has come down substantially from where it peaked in June 2022. In December 2024, this index rose 2.9% year over year.
Now that inflation is nearing the Fed's target of 2%, policymakers have started cutting rates. However, they now expect fewer cuts in 2025 since inflation has been somewhat stubborn recently. This has kept 30-year mortgage rates elevated in the upper 6% range, according to Zillow data.
What to expect from upcoming Fed meetings
Though mortgage rates don't always move in lockstep with the federal funds rate, it's a good idea to have a basic understanding of when and why Fed policy moves might impact mortgages — especially if you're planning to get a mortgage or refinance sometime soon. This means not only watching what the Fed does, but also what its officials say about future policy changes.
Upcoming Fed meetings and mortgage rate predictions
Recent projections from Fed officials suggest we may get two rate cuts in 2025. This is less than what was previously expected, which means mortgage rates might not drop as much this year. But it depends on how the economy evolves in the coming months and whether inflation continues to come down.
Key factors to watch
The big factors to watch are inflation and the labor market. As long as inflation continues to slow, the Fed will likely cut rates further. If the labor market appears to be weakening, the Fed may need to lower rates more quickly. But if conditions remain strong and inflation ticks up further, the Fed may keep rates steady or raise them.
The Fed's impact on mortgage rates FAQs
How does the Federal Reserve affect mortgage rates?
The Federal Reserve influences mortgage rates by setting the federal funds rate, which impacts borrowing costs, investor activity, and market conditions.
What happens to mortgage rates when the Fed raises interest rates?
When the Fed raises interest rates, mortgage rates often increase as well, making borrowing more expensive. Rates on other financial products, including savings accounts and Certificates of Deposit, usually rise, too.
How often does the Federal Reserve meet?
The Federal Reserve typically meets eight times a year to discuss and set monetary policy. This is when the Federal Funds rate can be increased or decreased.
Can Fed meetings predict future mortgage rate trends?
While Fed meetings provide insights, mortgage rates are influenced by various factors including economic data and market conditions.
Should I lock in my mortgage rate before a Fed meeting?
Whether you should lock in your mortgage rate depends on current rate trends and your own personal circumstances. Your loan officer can help you make an informed decision.