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Federal Reserve Chair Jerome Powell just threw cold water on the hope that mortgage rates could drop to 6% by the end of the year. Why? Economic growth is, by official numbers, too strong.
In a talk with business leaders last Thursday, Powell indicated that the pace of interest rate cuts is likely to be slower than anticipated over the near term. "The economy is not sending any signals that we need to be in a hurry to lower rates," said Powell.
So far this year, the central bank has made two interest rate cuts: the first 0.5% reduction in September was followed by a smaller 0.25% reduction on Nov. 8.
Before Powell's remarks last week, financial markets were betting on another 0.25% rate cut on Dec. 18. Now, it's a coin flip. While the Fed wants to avoid keeping borrowing rates too high — which could tip the economy into a recession — it's also wary of cutting interest rates too quickly only to see inflation reheat.
The bigger wild card is how the next administration's economic policies could shake things up. President-elect Donald Trump's proposals for tax cuts and tariffs could stimulate demand, increase deficits and push inflation back up (it's been slowly cooling in the direction of the Fed's annual target range of 2%).
That's not good news for the housing market or for would-be homebuyers, who have been sidelined by a combination of soaring mortgage rates, rising home prices and limited supply.
With longer-term Treasury yields holding high and a December cut on shaky ground, mortgage rates are prone to staying painfully elevated. For average home loan rates to drop to the 6% level before the start of 2025 is becoming more of a remote chance than a realistic forecast.
"It's not impossible for rates to do a sharp downturn between now and the end of the year, but it does seem highly unlikely," said Keith Gumbinger, vice president of mortgage site HSH.com.
Why are mortgage rates higher despite Fed rate cuts?
Average 30-year fixed mortgage rates surged roughly 0.7% since early October. According to the data we pull from Bankrate, today's average rate for a 30-year fixed mortgage is 6.92%.
Prior to the Fed's first rate cut in September, mortgage rates went down as fears mounted over unemployment and a potential economic downturn. Perhaps ironically, that offered a glimmer of hope to those hoping to purchase a home this year. Many expected home loan rates to plummet if the Fed rushed ahead with more reductions to its benchmark interest rate to avoid a recession.
But then, stronger-than-expected labor and inflation reports prompted investors to reconsider the outlook for future Fed cuts, and markets started defensively "pricing in" a Trump victory.
According to Colin Robertson, founder of the housing market site The Truth About Mortgage, the bond market already assumed higher inflationary pressures resulting from the presidential and congressional outcome. Because bond traders drove up rates before the election, Robertson expects some temporary rate relief, though there won't be any dramatic drops.
Powell has said it's too early to say how Trump's policies and a Republican-led Congress might alter the central bank's approach to achieving maximum employment and price stability. Overall, there's still a lot of uncertainty surrounding the timing and substance of economic changes and the Fed's cadence of interest rate adjustments over the next year.
"As markets process new information, the path of mortgage rates will be volatile," said Kara Ng, senior economist at Zillow. "Mortgage rates will fall, then rise, then fall again."
How do Fed cuts impact mortgage rates?
Inflation and labor data are a barometer for the health of the economy and influence the Fed's decision to adjust its benchmark short-term interest rate up or down.
Starting in early 2022, the central bank was laser-focused on taming inflation by implementing a series of aggressive rate hikes. Now that inflation has cooled and the labor market has weakened, the Fed pivoted to cutting interest rates to circumvent a job-loss recession.
The Fed doesn't have direct control over the mortgage market, but its monetary policy influences mortgage lenders and the general direction of borrowing rates. With each interest rate cut the Fed makes, it becomes less expensive for banks to borrow money, allowing them to lower the rates offered on consumer loans, including mortgages.
However, mortgages also respond to an interplay of economic factors, including investor expectations, geopolitical events and shifts in the bond market.