Mortgage rates are unlikely to fall even with another Fed rate cut

Mortgage rates haven’t changed much in the past week, but Wednesday’s meeting Federal Reserve should provide a clearer understanding of where the market is headed at year-end.

The Federal Open Market Committee (FOMC) is expected to announce its decision on the federal funds rate on Wednesday at 2 p.m. ET, while Chairman Jerome Powell will take questions from reporters at 2:30 p.m. Interest rate traders are almost unanimous that the Fed will cut the benchmark interest rate by 25 percent. basis points (bps) to a range of 4.25% to 4.5%.

The CME Group’s FedWatch tool gave a 95% chance of a 25 bp cut on Tuesday. This would be the third consecutive meeting with a rate cut, following a decline of 50 basis points in September and 25 basis points in November. But mortgage rates are not moving in line with lower policy rates and there are few indications that this pattern will change.

“Uncertainty remains the theme and will remain so as the Fed is unlikely to provide new guidance when it makes its interest rate decision on Wednesday,” said Afifa Saburi, capital markets analyst at Veterans United Home Loanssaid a statement. “We will have a new dot chart (interest rate forecast), but these projections will not yet take into account what will come from the new government’s policies.

“As these expectations are already priced in, the market should not retreat this week and mortgage rates are likely to remain largely unchanged.”

Patricia Maguire-Feltch, director of consumer products sales at Chase Home Loanstold HousingWire that predicting market reactions and mortgage rate movements after the Fed meeting is “difficult, if not virtually impossible.” But she also reiterated takeaways from a recent one Fannie Mae sentiment research that testifies to increasing positivity among consumers.

“We are seeing more optimism around the mortgage market and an increase in homebuying demand,” Maguire-Feltch said. “If interest rates continue to decline, it is likely that the lock-in rate will decrease and both homeowners and buyers will likely feel more comfortable taking on a higher rate.”

At HousingWire’s Mortgage Rate Center, the 30-year conforming fixed-rate loan averaged 6.85% on Tuesday, down 2 basis points from a week ago. The conforming 15-year fixed rate averaged 7.02%, up 1 basis point over the week. It’s unusual for the 15-year rate to be higher than the 30-year rate, but it’s a pattern that started emerging about a month ago.

“While historically the 15-year rate has been lower than the 30-year rate, both respond to a variety of economic factors, such as inflation and employment rates,” Maguire-Feltch explains. “Daily fluctuations in these numbers could be the market’s response to things like slowing inflation progress and rising consumer prices. As a result, this could have led to a slight jump in fifteen years. While this scenario is possible, it is unlikely to hold up in the long term.”

First American Senior economist Sam Williamson said the FOMC’s interest rate forecast released Wednesday is likely to show a less optimistic outlook for cuts in 2025.

“Several committee members have suggested that slowing the pace of rate cuts is appropriate given the recent outperformance of the U.S. economy and stalled progress in reducing inflation,” Williams said in a statement. “This includes a possible break in January, with a market-implied probability of 84 percent.”

Rates may not need to drop sharply to open a new window for refinancing activity. When interest rates fell to the low 6% level in September and October, nearly 300,000 borrowers took the opportunity to refinance, according to the December 2024 Mortgage Monitor report Intercontinental exchange. Borrowers with loan balances of more than $750,000 needed less stimulus than those with smaller balances, the report found.

“We saw volume increase because a 50 basis point decline made financial sense for many existing homeowners,” Maguire-Feltch said. “If interest rates fall below 6%, approximately 4.7 million consumers would qualify for a refinancing option, leading to more activity in the refinancing market and therefore greater demand for lenders.”

Maguire-Feltch also said that continued advances in artificial intelligence (AI) “will impact almost every aspect of mortgage lending.” She expects the shift away from paper-based processes will reduce the time and costs spent on each loan. This, in turn, could mitigate the impact of higher interest rates.

“AI will be used more in 2025 to analyze market trends and enable lenders to offer resources that fit the current market,” she said. “There is a lot riding on AI in 2025, but we expect it will be a few more years before we see sustainable effects from the technology.”