The Federal Reserve has cut interest rates, but mortgage rates have continued to rise. This may seem counterintuitive, as both rate cuts and changes in mortgage rates should be connected. However, the relationship between the two is more complex than a simple cause-and-effect.
When the Fed lowers its short-term federal funds rate, it can lead to an increase in long-term mortgage rates. This phenomenon has been observed before, but recently, it’s happening again. The average 30-year fixed-rate mortgage rate has reached 6.93%, the highest since early last July.
The connection between the Fed’s actions and mortgage rates is partly due to economic factors beyond interest rates. Inflation expectations, investor sentiment, and labor market trends all impact mortgage rates more directly than the federal funds rate. The Fed’s updated projections in December highlighted concerns about inflation risks, which led investors to demand higher yields on bonds and mortgage-backed securities.
The strong labor market, with positive job numbers and low unemployment, also contributes to higher inflation and, subsequently, higher mortgage rates. As wages grow, business and consumer demand increase, leading to a potential for higher inflation.
To predict where mortgage rates are headed in 2025, it’s essential to focus on inflation, the labor market, and the bond market. While the Fed may cut interest rates again, its actions may not directly influence mortgage rates. Statements from Fed Chair Jerome Powell and other FOMC members could have a greater impact on markets.
Most forecasts predict that mortgage rates will remain above 6% in 2025, with potential revisions upward in the first quarter of the year. Dr. Lisa Sturtevant, Chief Economist at Bright MLS, emphasizes that understanding the complex factors driving mortgage rates is crucial for making informed decisions about the housing market.
Source: https://www.realestatenews.com/2025/01/15/housing-market-decoded-why-fed-cuts-havent-kept-mortgage-rates-down