How the Federal Reserve Affects Mortgage Rates

The Federal Reserve voted to extend a pause on interest rate cuts for a third consecutive time this year. 

As markets face lingering inflation, heightened recession risks and overall uncertainty, holding rates steady gives the central bank time to assess the impact of President Donald Trump’s erratic tariff campaign, immigration policies and federal cutbacks. Interest rate cuts won’t come until July at the earliest, though Fed Chair Jerome Powell won’t commit to a timeframe.

“The hard data on inflation and unemployment will continue to drive interest rates, including mortgage rates, from one end of a trading range to the other, with only a slight downward trend in mortgage rates over the remainder of 2025,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association, in a statement following the decision. 

For the rest of the year, mortgage rates could fluctuate wildly within the 6% to 7% range or stay relatively steady, depending on the economy. 

Long-term rates like mortgages aren’t directly controlled by the Fed’s policymakers. Mortgage rates are closely tied to the bond market and investor predictions about what’s next. Mortgage lenders take their cues from the broader economic outlook and fiscal indicators. 

“The Fed doesn’t set mortgage rates, but it sets the tone,” said Nicole Rueth of The Rueth Team with Movement Mortgage. 

The Fed’s monetary policy isn’t entirely to blame for an unaffordable housing market plagued by limited inventory and steep home prices. For homeownership to become accessible, the housing supply would have to increase, and both interest rates and prices would have to drastically come down. Experts say that’s not a likely scenario in 2025. 

How does the Fed’s rate pause affect mortgages?

After making three interest rate cuts in 2024, the Fed has been in a holding pattern this year. The central bank is still gauging how Trump’s agenda will affect inflation and employment. 

At the same time, there are serious concerns about a potential US recession, marked by a shrinking GDP, rising jobless claims and falling consumer confidence.

“The Federal Reserve is in one of the trickiest spots in recent economic history,” said Ali Wolf, Zonda and NewHomeSource chief economist. 

Lowering interest rates could allow inflation to surge, which is bad for mortgage rates. Keeping rates high, however, increases the risk of a job-loss recession that would cause widespread financial hardship. 

“This is why there’s been a lot of ‘wait and see’ happening from the Fed,” Wolf said. 

In a May 7 press conference, Chair Powell discussed the heightened risks of both unemployment and inflation, tempering concerns with statements about the economy’s good health. 

Watch this: 6 Ways to Reduce Your Mortgage Interest Rate by 1% or More

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Do mortgage rates follow the Fed?

The Fed sets and oversees US monetary policy under a dual mandate to maintain price stability and maximum employment. It does this largely by adjusting the federal funds rate, the rate at which banks borrow and lend their money. 

When the economy weakens and unemployment rises, the Fed lowers interest rates to encourage spending and propel growth, as it did during the COVID-19 pandemic. 

It does the opposite when inflation is high. For example, the Fed raised its benchmark interest rate by more than five percentage points between early 2022 and mid-2023, to slow price growth by curbing consumer borrowing and spending.

Changes in the cost of borrowing set off a slow chain reaction that eventually affects mortgage rates and the housing market, as banks pass along the Fed’s rate hikes or cuts to consumers through longer-term loans, including home loans. 

Yet, because mortgage rates respond to several economic factors, it’s not uncommon for the federal funds rate and mortgage rates to move in different directions for some time. 

Read more: Why Labor Data Matters for Mortgage Rates and the Fed

What is the outlook for Fed rate cuts and mortgage rates?

While the Fed’s projections point to two cuts this year, with the first potentially coming in July, much is still uncertain. 

“Tariffs add inflation risk while simultaneously slowing demand; it’s a policy nightmare for the Fed,” said Rueth.

For the Fed to resume lowering interest rates, policymakers would need to see an ongoing decline in inflation or a rapid deterioration of the labor market. If unemployment spikes and the economy slows further, the Fed will likely be forced to implement interest rate cuts. In that case, mortgage rates should gradually ease, though not quickly or drastically. 

Most housing market forecasts, which already factor in at least two 0.25% Fed cuts, call for 30-year mortgage rates to stay above 6% throughout 2025. 

What other factors affect mortgage rates?

Mortgage rates move around for many of the same reasons home prices do: supply, demand, inflation and even the employment rate. 

Personal factors, such as a homebuyer’s credit score, down payment and home loan amount, also determine one’s individual mortgage rate. Different loan types and terms also have varying interest rates. 

Policy changes: When the Fed adjusts the federal funds rate, it affects many aspects of the economy, including mortgage rates. The federal funds rate affects how much it costs banks to borrow money, which in turn affects what banks charge consumers to make a profit.

Inflation: Generally, when inflation is high, mortgage rates tend to be high. Because inflation chips away at purchasing power, lenders set higher interest rates on loans to make up for that loss and ensure a profit.

Supply and demand: When demand for mortgages is high, lenders tend to raise interest rates. This is because they have only so much capital to lend in the form of home loans. Conversely, when demand for mortgages is low, lenders tend to slash interest rates to attract borrowers.

Bond market activity: Mortgage lenders peg fixed interest rates, like fixed-rate mortgages, to bond rates. Mortgage bonds, also called mortgage-backed securities, are bundles of mortgages sold to investors and are closely tied to the 10-year Treasury. When bond interest rates are high, the bond has less value on the market where investors buy and sell securities, causing mortgage interest rates to go up.

Other key indicators: Employment patterns and other aspects of the economy that affect investor confidence and consumer spending and borrowing also influence mortgage rates. For instance, a strong jobs report and a robust economy could indicate greater demand for housing, which can put upward pressure on mortgage rates. When the economy slows and unemployment is high, mortgage rates tend to be lower.

Read more: Fact Check: Trump Doesn’t Have the Power to Force Lower Interest Rates

Is now a good time to get a mortgage?

Even though timing is everything in the mortgage market, you can’t control what the Fed does. “Forecasting interest rates is nearly impossible in today’s market,” said Wolf. 

Regardless of the economy, the most important thing when shopping for a mortgage is to make sure you can comfortably afford your monthly payments. 

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