The Federal Reserve wrapped up its first meeting of 2025 by keeping interest rates steady at 4.25% to 4.50%, following three cuts in late 2024, CBS News reports. This decision comes as inflation is persisting, with December’s Consumer Price Index rising to 2.9%. While some may hope the rate pause will lower mortgage rates, that’s unlikely in the short term. Mortgage rates are influenced by a number of factors, including Fed policy, but also inflation, Treasury yields, and broader economic conditions. There are a number of ways mortgage rates could be affected by the decision, with some scenarios benefitting borrowers and others not so much.
One scenario where the Fed pause could benefit mortgage rates is if financial markets perceive the Fed as having done enough to control inflation. For example, if investors believe inflation will continue trending lower without additional rate hikes, demand for government bonds could increase, driving down Treasury yields and, consequently, mortgage rates. This would be a welcome relief for homebuyers who have faced steep borrowing costs in recent years.
On the other hand, if inflation remains persistent and economic data continues to show strength, mortgage rates might not come down meaningfully in the short term. In this case, investors could start to doubt that the Fed will cut rates as early as May, keeping bond yields elevated and limiting any decline in mortgage rates. Or, if the labor market remains tight and consumer spending stays robust, lenders might be hesitant to lower mortgage rates significantly out of fear over continued inflation pressures. Read more
