Will the Fed’s rate cut help lower mortgage rates?

The Federal Reserve is expected to announce this third rate cut for 2024 at its policy meeting tomorrow.

In an effort to tame inflationthe central bank began raising interest rates in early 2022, sending mortgage rates into unaffordable territory. When the Fed moved to cut interest rates this fall because of lower inflation, many prospective homebuyers thought mortgage rates he would come down immediately.

However, the Fed does not specify directly home loan rates. Its monetary policy decisions act more as a guiding hand for banks and lenders across the country.

Mortgage ratesdriven by investor expectations and the bond market, are always volatile. Because they typically outpace the Fed, Wednesday’s rate cut is already priced into today’s long-term rates. Rather than a catalyst for interest rate moves, the Fed’s official announcement tomorrow will serve as a confirmation of investors’ expectations.

Fed Chairman Jerome Powell’s post-meeting remarks on outlook for the economy and monetary policy in 2025. will be more important for mortgage rates. If Powell proposes a significantly slower pace of rate cuts next year, mortgage rates could rise in the near term, he said. Nicole Ruettsenior vice president of the Rueth team powered by Movement Mortgage.

Here’s what you need to know about the impact of the government’s interest rate policy mortgage rates.

What does the Federal Reserve do?

The Fed was created by Federal Reserve Act of 1913 to set and control US monetary policy to stabilize the economy. It consists of 12 regional banks and 24 branches and is governed by a board of governors who are voting members of the Federal Open Market Committee. The FOMC sets the benchmark interest rate at which banks borrow and lend their money.

In an inflationary environment, the Fed uses interest rate hikes to slow economic growth and make borrowing money more prohibitively expensive. Banks typically pass rate hikes on to consumers in the form of higher interest rates on longer-term loans, including home loans. When the economy is in a slump or recession, the Federal Reserve cuts interest rates to stimulate consumer spending and stimulate growth.

Read more: How jobs data could affect mortgage rates in 2024

How does the Fed affect mortgage rates?

The Federal Reserve does not directly set mortgage interest rates, but it does influence them by making changes to the federal funds rate, the interest rate that banks charge each other for short-term loans. The Fed’s decisions change the cost of credit, which has a domino effect on mortgage rates and the broader housing market over the long term.

“When the Fed raises interest rates to slow the economy, interest rate-sensitive sectors such as technology, financials and housing tend to feel the impact first,” said Alex Thomassenior research analyst at John Burns Research and Consulting.

It is important to watch the Fed’s actions. Its decisions affect your money in many ways, including the APR on your credit cards, the yield on your savings accounts, and even your stock market portfolio.

What are the prospects for interest rate and mortgage rate cuts from the Fed?

Looking ahead to 2025, if the Fed implements further rate cuts, mortgage rates should gradually decrease. But the timing of those cuts, as well as the economic data we get between each policy meeting, will determine how fast (and how far) mortgage rates can fall.

The Fed has made two interest rate cuts since September and is expected to implement another 0.25% cut on December 18. At tomorrow’s meeting, the central bank will also announce its own Summary of economic forecasts outlining its outlook for interest rates in the coming months. The current SEP projects about four cuts of 0.25% in 2025, but that forecast is likely to be revised given the continued strength of the economy.

The economic policies of the next administration will likely cause the Fed to back away from easing interest rates. To President-elect Donald Trump proposals to reduce taxes and tariffs could stimulate demand, increase deficits and push inflation back up, giving the Fed an incentive to keep interest rates higher for longer.

At its first reunion for 2025. on January 28-29, experts say the central bank is likely to hold off on cutting interest rates, delaying further policy changes until at least March.

While much is still uncertain, it will be difficult for 30-year fixed mortgage rates to fall below 6% without weaker economic data and continued Fed tapering.

What factors affect mortgage rates?

Mortgage rates move for many of the same reasons home prices move: demand, supply, inflation, and even the employment rate. Additionally, the individual mortgage interest rate you qualify for is determined by personal factors such as your credit score and loan amount.

Economic factors that affect mortgage rates

• Fed policy changes: When the Federal Reserve adjusts the federal funds rate, it spills over into many aspects of the economy, including mortgage rates. The federal funds rate affects how much it costs banks to borrow money, which in turn affects what banks charge consumers to make a profit.

• Inflation: In general, when inflation is highmortgage rates tend to be high. As inflation reduces purchasing power, lenders set higher interest rates on loans to offset this loss and ensure a profit.

• Supply and Demand: When mortgage demand is high, lenders tend to raise interest rates. The reason is that lenders have so much capital to provide in the form of home loans. Conversely, when demand for mortgages is low, lenders lower interest rates to attract borrowers.

• The bond market: Mortgage lenders tie fixed interest rates, such as fixed rate mortgages, to bond yields. Mortgage bonds, also called mortgage-backed securities, are bundles of mortgages sold to investors and are closely related to the 10-year Treasury. When bond interest rates are high, the bonds have less value in the market where investors buy and sell the securities, causing mortgage interest rates to rise.

• Other economic indicators: Employment patterns and other aspects of the economy that affect investor confidence and consumer spending and borrowing also affect mortgage rates. For example, a strong jobs report and a robust economy could mean more demand for housing, which could put pressure on mortgage rates. When the economy slows and unemployment is high, mortgage rates tend to be lower.

Personal factors that affect mortgage rates

The specific factors that determine your particular mortgage interest rate include:

Is now a good time to shop for a mortgage loan?

Although timing is everything in the mortgage market, you can’t control what the Fed does.

You can get best prices and conditions available, making sure your financial profile is sound as you compare terms and interest rates from multiple lenders.

Regardless of the economy, the most important thing when shopping for a mortgage is to make sure you can comfortably afford your monthly payments.

“Buying a home is the biggest financial decision a person will make,” Kushi said. If you’ve found a home that fits your lifestyle needs and budget, buying a home in today’s housing market can make financial sense, Kushi noted.

If you are on the price, it is better to wait. “Sitting on the sidelines can allow a potential buyer to continue to pay down their debt, build their credit and save for the down payment and closing costs,” she said.

The bottom line

When the Federal Reserve adjusts the benchmark interest rate, it indirectly affects mortgage rates. The Fed’s rate cut will help mortgage rates improve, although it won’t be dramatic or immediate. Mortgage rates will also react to inflation, investor expectations and the broader economic outlook. Experts predict that mortgage rates should decline slowly over the next year.

If you are looking for a mortgage, compare the rates and terms offered by banks and lenders. The more lenders you interview, the better your chances of securing a lower mortgage rate.

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