Here's What Markets Now Predict for 2025 Fed Rate Cuts—And What It Could Mean for Mortgage Rates
Key Takeaways
- In January, the Fed opted to hold interest rates steady, ending a succession of three consecutive rate cuts in late 2024.
- However, renewed reductions could be coming, with financial markets currently pricing in at least two rate cuts by the end of this year.
- However, how that will affect mortgage rates is murky, as the Fed’s rate is just one of many factors that influence mortgage prices. In fact, mortgages and the Fed can move in opposite directions.
- Lately, 30-year mortgage rates have been sliding modestly lower based on the expectation that the Fed will make modest cuts later this year.
- Whether or not that happens, any potential improvement in mortgage rates will likely be slow and gradual rather than dramatic.
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What Markets Currently Predict from the Fed in 2025
At the end of January, the Federal Reserve announced an interest rate hold, maintaining the federal funds rate at its current level. That paused a three-meeting run of rate cuts between September and December 2024, which had lowered the benchmark rate by a full percentage point. Previously, the Fed had held its key rate at a historic 23-year high for 14 months.
Now, another Fed meeting is coming, with the central bank’s rate-setting committee scheduled to announce its next decision on Mar. 19. Though anything can happen in the next three weeks, it’s overwhelmingly predicted that the Fed will hold its benchmark rate steady once again.
But there will be six more Fed rate-setting meetings in 2025 after the March gathering, and according to the CME Group’s FedWatch Tool, interest rate futures traders are currently pricing in more than a 75% probability that at least two rate cuts of 0.25 points each will be announced by the December 2025 meeting. That includes 44% odds that at least three reductions will be implemented.
As for when the Fed’s predicted rate reductions will arrive, markets are betting we’ll be waiting several months before the first cut of 2025. It’s not until the Fed’s June 18 meeting that the majority odds favor a quarter-point rate cut.
As we always caution, rate predictions far into the future should not be considered reliable, as the Fed makes each of its rate decisions meeting by meeting based on the latest economic data available. In addition, there is particular uncertainty right now due to the possibility of the Trump administration implementing tariffs, which could impact inflation rates.
Will a Lower Fed Rate Mean Lower 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, if the Fed reduces its benchmark rate later this year, can we expect mortgage rates to drop?
Unfortunately, the relationship between the 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, a complex mix of economic factors also affects the mortgage lending market. 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—even in opposite directions.
That’s essentially what we saw in the last quarter of 2024 when mortgage rates shot up despite a bold half-point rate cut in September. Not only that but after two more Fed reductions, 30-year mortgage rates surged again, reaching almost 1.25 percentage points higher than they were before the Fed’s first rate cut.
Fed officials are now in “wait and see” mode, holding steady rates. But the flagship mortgage rate has mostly been falling. So what gives?
As we mentioned, the Fed funds rate is just one of the many components influencing mortgage rates. And one especially important factor is the future outlook for the Fed’s benchmark rate. In other words, what’s expected to happen with the Fed rate is often more impactful to mortgage rates than where the federal funds rate sits right now. And with two or three rate cuts currently forecasted, mortgage rates are seeing some declines.
So, where will that take us for the rest of 2025? While the Fed’s historic rate-hike campaign of 2022-2023 was fast and furious, the central bankers are expected to lower rates at a much more gradual pace. Indeed, even if we see three rate cuts this year, that would mean four of the next seven Fed meetings would result in uneventful rate holds.
As a result, any mortgage rate improvements we see triggered by Fed rate cuts in 2025 are likely to be more measured than dramatic. And as we’ve seen in the past, there is no guarantee on where they may go.
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., 2025. Use is subject to the Zillow Terms of Use.