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Federal Reserve Holds Interest Rates Steady: Impact on Mortgage Rates and the Housing Market

Writer's picture: Juan Soto Juan Soto

The Federal Reserve paused rate cuts, keeping interest rates steady. Here’s how it impacts mortgage rates, the housing market, and future policy.

The Federal Reserve decided to keep interest rates steady at 4.25% to 4.5% on Wednesday, pausing its recent streak of rate cuts. This move wasn’t unexpected, given the resilience of the labor market and persistent inflation pressures. Despite earlier rate reductions, the Fed is signaling a more cautious approach moving forward, likely waiting for clearer signs that inflation is cooling before making further adjustments.


Market Expectations Confirmed


Most analysts had already anticipated this decision. Since September, the Fed had cut rates by a total of 100 basis points (bps), starting with a 50-bps reduction, followed by two 25-bps cuts in November and December. But with inflation still hovering above the Fed’s 2% target, policymakers are reluctant to ease too aggressively.


Eric Orenstein, senior director at Fitch Ratings, explained that the Fed’s decision reinforces what Treasury yields have already been indicating—persistent inflation risks will likely keep mortgage rates elevated in the near term. While refinancing activity could pick up if long-term rates drop by about 75 bps, Orenstein pointed out that the momentum has slowed significantly compared to just three months ago.


The Housing Market Impact


For homebuyers and mortgage lenders, the Fed’s cautious stance means borrowing costs will remain high. David Sober, senior vice president of enterprise business development at Voxtur Analytics, believes a rate cut won’t happen until at least the second half of the year. That means affordability challenges will continue, particularly for first-time homebuyers who are already struggling with high home prices and expensive monthly payments.


Sober also noted that independent mortgage banks (IMBs) will likely remain key players in the market. Unlike traditional banks, IMBs have more flexibility to offer creative financing solutions, which could help some borrowers navigate the high-rate environment. However, for mortgage rates to see a meaningful drop—potentially to 6% by 2025—there would need to be a more significant shift in economic conditions, particularly a steady decline in inflation and a softening labor market.


Melissa Cohn, regional vice president at William Raveis Mortgage, highlighted another key factor to watch: the Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge. The December data, set to be released on Friday, has fluctuated between 2.1% and 2.4% since August, staying just above the Fed’s target. Cohn pointed out that this report could be crucial in shaping the Fed’s next move ahead of its March meeting.


She also addressed speculation about political influence over monetary policy, emphasizing that the Fed operates independently and won’t adjust rates just because former President Donald Trump wants them to. Instead, mortgage rates will continue to be guided by inflation trends and employment data.


Mortgage Rates and Treasury Yields


Despite the Fed’s 100-bps rate cuts since September, mortgage rates have actually increased. Back on September 18, the 30-year conforming loan average was at 6.31%. As of Wednesday, it had climbed to 7.12%. This upward movement is a reminder that mortgage rates don’t always move in lockstep with the Fed’s policy decisions; they are also influenced by broader market dynamics, particularly Treasury yields.


Logan Mohtashami, lead analyst at HousingWire, explained that the spread between the 10-year Treasury yield and 30-year mortgage rates has improved since peaking in mid-2023. Without this improvement, mortgage rates could be nearly 0.79% higher, pushing them close to 8%. However, if spreads returned to historical norms, mortgage rates could be closer to 6%. This spread will be a key factor to monitor in the months ahead.


Trump vs. Powell: A Policy Clash


The Fed’s cautious approach has also reignited tensions between Donald Trump and Fed Chair Jerome Powell. Trump has long criticized Powell’s handling of monetary policy, arguing that rates should be cut more aggressively to spur economic growth. In contrast, Powell remains focused on preventing inflation from rebounding and overheating the economy.


This policy divide could shape future monetary decisions. Trump favors looser monetary policy, believing that lower interest rates would stimulate homeownership and business investment. Powell, however, is prioritizing long-term economic stability, signaling that any additional rate cuts will be dictated by economic data, not political pressure.


As Trump continues to push for a more aggressive rate-cutting approach, Powell remains committed to a measured strategy, which could lead to more friction between the two. This ongoing power struggle is likely to impact financial markets, investor sentiment, and even broader economic policy in the coming months.


Looking Ahead


With the Fed signaling patience before making further cuts, mortgage rates are expected to remain elevated for the foreseeable future. The next major indicator to watch will be the PCE index, which could provide insight into whether inflation is cooling enough to justify a rate cut later this year.


In the meantime, homebuyers, investors, and lenders should prepare for continued volatility. Treasury yields and mortgage rate spreads will remain critical factors in determining the direction of borrowing costs. Those looking to enter the housing market may need to explore alternative financing options or wait for more favorable conditions before making a move.

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