In recent weeks, mortgage rates have fallen ahead of the Federal Reserve’s March meeting, and the spring homebuying season is underway. Are rate cuts on the table for the year ahead, and how might factors driving Fed policy impact mortgage rates? Here’s an outlook.
How the Fed influences mortgage rates and home sales
There are times when the Federal Reserve very clearly sets the tone for mortgage rates. Early in the pandemic, the Fed slashed rates to zero, and mortgage rates followed, plunging to record lows. Then, in 2022, the Fed began to raise rates aggressively. Mortgage rates soared, going from less than 3 percent in early 2021 to 8 percent by late 2023.
Now, with the Fed in a holding pattern, mortgage rates seem untethered from central bank policy. For example, in mid-September 2024, the average rate on 30-year loans was 6.2 percent, according to Bankrate’s national survey of lenders. Then the Fed cut rates at three meetings in a row, cumulatively lowering its benchmark rate by a full percentage point. And what did mortgage rates do? They bucked the Fed and shot up, rising above 7 percent.
That recent disconnect between Fed rates and mortgage rates suggests that if the central bank simply cuts rates one time this year, as most observers expect, there will be no significant effect on mortgage rates.
Last year, as mortgage rates zigged while Fed policy zagged, it was useful to remember that the Fed doesn’t set mortgage rates. Instead, mortgage rates are benchmarked off 10-year Treasury yields, and they’re dictated by the sentiment of the investors who buy mortgages after they’re packaged up as securities.
On a hopeful note for homebuyers, mortgage rates fell in late February and early March after holding steady above 7 percent for the start of 2025.
“As the spring homebuying season gets underway, the 30-year fixed-rate mortgage saw the largest weekly decline since mid-September,” said Sam Khater, Freddie Mac’s chief economist. “The decline in rates increases prospective homebuyers’ purchasing power and should provide a strong incentive to make a move.”
What the Fed is expected to do in March
The Federal Reserve’s Federal Open Markets Committee convenes March 18-19. Fed Chairman Jerome Powell has already signaled his intention to leave rates unchanged.
“With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance,” Powell said last month during an appearance before the Senate Banking Committee.
How many cuts might the Fed enact this year, and when would they happen?
The answer to that question is a moving target, and one that’s exceedingly difficult to forecast. President Donald Trump has publicly called for the central bank to lower rates as soon as possible. However, Fed watchers don’t think the central bank will move soon. One important driver of Fed policy, inflation, has been inching back up — it reached 3 percent in January, according to the U.S. Labor Department.
“Progress toward 2 percent inflation has stalled out, and the Fed knows it,” says Greg McBride, chief financial analyst at Bankrate.
Given the persistence of inflation, many economists now expect the Fed to keep rates unchanged for much of 2025. For instance, the Mortgage Bankers Association’s February forecast calls for the Fed to cut rates just once this year, during the fourth quarter of 2025. That mirrors the market consensus, which calls for just one reduction to the federal funds rate this year.
But the economic picture is always changing. For example, Trump recently imposed new tariffs that could affect the outlook.
“It’s very likely that the economy is slowing down as a result of everything that’s going on, and that the Fed will have a hard decision at their next meeting,” says Melissa Cohn, regional vice president at William Raveis Mortgage.
We know that they’re going to be heavily pressured to cut rates. We know that they don’t pay attention to that pressure, but if we all of a sudden see weakness, that may force their hand to cut rates before they would like to.
— Melissa Cohn
Regional Vice President, William Raveis Mortgage
What to watch: Factors driving Fed policy
Inflation is perhaps the most important single number for Fed policy. As inflation spiked during the pandemic, the Fed had little choice but to raise rates aggressively. And when inflation seemed to be under control in 2024, the Fed responded by cutting rates three times.
However, inflation has edged back up, which could put upward pressure on mortgage rates.
Meanwhile, the job market is another key part of Fed policy. If the job market weakens, the central bank can cut rates to boost the economy. When the job market is strong, as it was as of early 2025, the Fed considers raising rates to slow the economy. The official unemployment rate in February was 4.1 percent, changing little from 4 percent in January, according to the Labor Department.
“Labor market conditions have cooled from their formerly overheated state,” Powell said last month during his prepared testimony.
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