HousingWireHousingWire
The Federal Reserve on Wednesday paused its recent string of interest rate cuts, holding benchmark rates steady at a range of 4.25% to 4.5%. The move was widely expected considering recent employment and inflation data showing that the U.S. economy continues to run hot.
Market analysts were nearly unanimous heading into the day that the Fed would pause its rate-cutting cycle that began in September when it lowered the policy range by 50 basis points. The cuts continued in November and December with a pair of 25-bps cuts.
Melissa Cohn, regional vice president at William Raveis Mortgage, said in written commentary on Wednesday that market observers should keep their eyes on the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index.
Data for December will be released Friday, and the annualized growth for the PCE index has floated between 2.1% and 2.4% since August, slightly above the Fed’s target inflation goal of 2%. This data could provide a better road map of where rates are headed before the Fed’s next meeting in mid-March.
Cohn also said that Fed policymakers have remained an “independent body and will not just lower rates if asked,” a direct reference to calls from President Donald Trump to lower the federal funds rate and spur economic growth — including more home sales.
“Mortgage rates will move with inflation and employment data, as always, even with all the uncertainty behind President Trump’s implementation of his new policies and the impact on inflation and the economy. … There are a lot of unknowns at the moment,” Cohn said.
“President Trump is working fast to implement many of his desired policies and campaign promises. So far, there has been little, if any, impact. It will take time to see how everything plays out in Washington and how the new policies impact inflation and the economy.”
Even as the Fed funds rate has been lowered by a total of 100 bps since September, mortgage rates have gone in the opposite direction. Since Sept. 18, when the Federal Open Market Committee (FOMC) announced its first rate cut since March 2020, the 30-year conforming loan average has shot up from 6.31% to 7.12% as of Wednesday.
Mortgage rates tend to more closely follow the direction of Treasury yields. HousingWire Lead Analyst Logan Mohtashami noted that the spread between the 10-year Treasury and the 30-year mortgage rate has narrowed significantly since peaking in June 2023.
“The U.S. housing market would have been much worse without better spreads in 2024 and now going into 2025,” Mohtashami wrote on Saturday. “If we applied the worst spread levels from 2023 to today’s rates, we would see an increase of an additional 0.79% in the mortgage rate — getting near 8%. On the other hand, if mortgage spreads were at their typical levels, we could expect mortgage rates to be approximately 0.74% to 0.84% lower than they are now, which means mortgage rates near 6%.”
Although Trump might not have much direct influence over mortgage rates, his newly confirmed Treasury Secretary, Scott Bessent, could. Bessent has suggested that Fannie Mae and Freddie Mac could use some of their earnings to buy mortgage-backed securities, which would narrow the spreads and potentially create lower mortgage rates to spur more home purchases and refinances.
“This scenario is more likely than President Trump requesting funding from Congress to lower mortgage rates,” Mohtashami added.
Editor’s note: This is a developing story and will be updated following Fed Chair Jerome Powell’s press conference on Wednesday.
