Mortgage Rates to Hold Firm as Fed Continues ‘Wait-and-See’ Approach

Mortgage rates will stay largely unchanged after the Fed held rates steady at its May meeting, opting to remain in a noncommittal “wait-and-see” mode until more information is known about the state of the U.S. economy.

The Fed kept the Federal Funds rate unchanged, as expected, and signaled no action on rates until there is “further clarity” on trade policy. Chair Powell’s press conference message was fairly simple: The Fed is in no hurry to do anything. He emphasized the high level of uncertainty associated with the tariffs themselves and their economic effect, saying “risks have risen, but they haven’t materialized yet.” Bond markets had been expecting a cut at the June Fed meeting—until last Friday’s strong jobs report. Since then, rates have risen slightly as investors pushed expectations for a cut back to the July Fed meeting. Today’s meeting did not include an update to the Fed’s forecast for interest rates, as it is only updated every other meeting. If it did, however, the forecast would probably show fewer 2025 rate cuts than the three that bond market investors are currently expecting.

Looking ahead, with the dual risk of higher inflation and unemployment putting the Fed in a bind, it is difficult to imagine any relief for mortgage rates without a fairly severe recession. The Fed’s mandate is to keep both inflation and unemployment low, but the economic risks that high tariffs pose threaten both sides of that mandate. As Chair Powell said: “If inflation is rising while unemployment is going up, which isn’t a choice we currently face, this would be a complicated and challenging judgment that we’d have to make.” Recent experience suggests that unless the Fed is very confident that the inflation risks are temporary and/or the recession risks become outsized, the Fed will choose to fight inflation by keeping rates high, rather than boost employment by bringing rates down.

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