The Fed Has Lowered Rates Again. Does That Mean 2025 Mortgage Rates Will Fall?
Key Takeaways
- The Federal Reserve on Wednesday announced its third consecutive rate cut, lowering its benchmark interest rate another quarter point.
- But the Fed’s rate is just one in a tangle of factors that move mortgage prices. In fact, the two can even move in opposite directions—and it’s happening right now.
- Ahead of the Fed’s September rate cut, 30-year mortgage rates fell to a two-year low. Yet three Fed cuts later, mortgage rates have surged more than a full point higher.
- The upward push is driven by the Fed indicating that it now expects interest rates to remain higher in 2025 than originally projected—forecasting only a half-point reduction next year instead of a full point.
- A slower, more gradual path downward for the federal funds rate could mean that 2025 mortgage rates improve less than initially anticipated.
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The Web of Factors That Determines Mortgage Rates
It’s popularly believed that when the Federal Reserve raises the federal funds rate—as it did aggressively during 2022 and 2023—mortgage rates are pushed higher. Conversely, when the Fed lowers the federal funds rate, it’s usually expected that mortgage rates will fall. So does the Fed rate cut announced Wednesday—its third in as many meetings—mean we can expect mortgage rates to drop?
Unfortunately, the relationship between the central bank’s federal funds rate and what mortgage lenders offer is not quite so clear. Instead, moves by the central bank more directly impact short-term rates, like bank deposit rates and credit card and personal loan APRs.
Since fixed mortgages offer the stability of a long-term rate, their connection to Fed rate changes is more tenuous. Beyond the federal funds rate, the mortgage lending market is also affected by a complex mix of many economic factors. These include inflation, consumer demand, housing supply, the strength of the current economy, and the status of the bond market, especially that of 10-year Treasury yields. Given these other influences, mortgage rates and the Fed funds rate can move independently—and as we’ll see, even in opposite directions.
The Fed Has Been Cutting Rates, Yet Mortgage Rates Are Surging
The Federal Reserve raised its benchmark interest rate to a 23-year high in July 2023, following a historic rate-hike campaign in 2022-2023 that targeted post-pandemic inflation. After maintaining the federal funds rate at that elevated level for 14 months, the central bank finally began bringing it down in September.
Its first cut, announced on Sept. 18, was a bold half-point reduction. The Fed then followed that with a 0.25-point cut on Nov. 7, and then another quarter-point reduction Wednesday. That has taken the benchmark rate down a full percentage point over the past three months.
At the same time, however, 30-year mortgage rates have moved in the opposite direction. Although the flagship mortgage rate average sank to a two-year low on Sept. 17—dropping as far as 5.89% the day before the Fed’s first cut took effect—it has surged much of the time since. In fact, Thursday’s 6.98% mortgage average is almost 1.1 percentage points higher than at the time of the Fed’s first rate cut on Sept. 18.
So what gives? As we mentioned, the Fed funds rate is just one of the many components influencing mortgage rates. What we learned on Wednesday was not just that the Fed was cutting rates a quarter point—that was widely expected and already baked into bond traders’ and lenders’ pricing. More consequential to mortgage rates this week is the Fed’s future rate outlook.
The Fed’s Signal for 2025 and 2026 Has Dampened Mortgage Rate Expectations
Every three months, the central bank supplements its rate-setting announcement with the release of its Summary of Economic Projections. The most anticipated portion of this report is the quarterly “dot plot,” which lays out where the 19 Fed committee members predict the federal funds rate will be at the end of the next 2-3 years.
Wednesday’s meeting included the latest quarterly dot plot, and it showed that the Fed committee has dialed back its expectations for rate reductions in 2025 and beyond. Instead of September’s forecast of rate decreases totaling a full percentage point next year—which would likely have come in four quarter-point cuts—the central bankers now collectively predict just a 0.50-point reduction or two cuts. Similarly, the Fed’s forecast for 2026 also leaves the federal funds rate a half-point higher than before.
This change in interest rate outlook had an immediate impact on the 10-year treasury yield, which jumped 11 basis points Wednesday afternoon and then another 6 basis points Thursday. This abrupt rise in the 10-year yield is what has triggered a surge of 20 basis points in Wednesday and Thursday mortgage rates.
In 2022–2023, the Fed’s historic rate-hike campaign was fast and furious. However, the central banker is expected to lower rates at a much more gradual pace than it raised them. Now we see that the decline could be even slower than expected—and as a result, mortgage rate improvements in 2025 are likely to be more measured than dramatic.
How We Track the Best Mortgage Rates
The national and state averages cited above are provided as is via the Zillow Mortgage API, assuming a loan-to-value (LTV) ratio of 80% (i.e., a down payment of at least 20%) and an applicant credit score in the 680–739 range. The resulting rates represent what borrowers should expect when receiving quotes from lenders based on their qualifications, which may vary from advertised teaser rates. © Zillow, Inc., 2024. Use is subject to the Zillow Terms of Use.