Mortgage Rates Jump Higher After Fed Projects Fewer 2025 Cuts

The Fed cut the fed funds rate by 25 bps on Wednesday, as widely expected, but mortgage rates increased as the Fed reduced its 2025 projections from four cuts to two amid stickier-than-expected inflation and considerable policy uncertainty.

Fed officials cut the fed funds rate for the third meeting in a row by 25 bps, which will have no effect on mortgage rates, as it was entirely priced in. The fed funds rate has now been cut by a total of 100 bps since September 18, from 5.5% to 4.5%. That represents considerable progress from a highly restrictive territory to something much closer to neutral rate estimates (the range in which monetary policy is neither restricting nor stimulating the economy), which range from around 2.5% to 4%. Mortgage rates have moved in the opposite direction since September, however, as they are long term rates influenced by many factors beyond the Fed’s policy rate.

The Fed expects that inflation will only decline slightly from 2.8% to 2.5% over the course of 2025. Recent inflation reports have shown little progress on inflation, with the 12-month change in prices largely going sideways rather than declining. Furthermore, Chair Powell shared that some Fed officials are now beginning to take into account the potential inflationary impact of any new tariffs. He also declined to commit to a policy of “seeing through” the inflationary impact of any tariff increases, as they are one-time price increases. These two factors led Fed officials to increase their expectations for inflation at the end of 2025 from 2.2% to 2.5%.

Chair Powell says we are now in “a new phase” where the Fed “is going to be cautious about further cuts.” Specifically, the Fed now only expects two cuts in 2025. This change was largely expected, but represents a considerable slowdown relative to the 100 bps of total cuts in the last quarter of 2024. It is also significantly less than the four 25 bps cuts they had projected in their September 18 meeting. Based on Chair Powell’s comments, futures markets are taking it even further and are now pricing in only one 25 bps cut.

Mortgage rates increased today as 10 year treasury yields rose throughout Chair Powell’s press conference. The ten year treasury yield is currently up by about 10 bps, with mortgage rates up 21 bps after the Fed’s announcement.

The post Mortgage Rates Jump Higher After Fed Projects Fewer 2025 Cuts appeared first on Redfin Real Estate News.