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The Federal Reserve’s first meeting of 2025 concluded this week with a decision that caught few by surprise. After implementing three rate cuts in late 2024, the central bank has opted to keep its benchmark federal funds rate steady at 4.25% to 4.50%. The pause comes as inflation showed signs of stubborn persistence, with the December Consumer Price Index rising to 2.9%, up from a 2.7% reading the month prior.
This move aligned closely with market and analyst expectations. Prior to the January Fed meeting, a FactSet poll noted that more than 90% of economists anticipated that the Fed would hold rates steady at this meeting. The same poll showed that economists widely agree that the Fed will continue to hold on interest rate adjustments at its March meeting. Most analysts now expect that the earliest opportunity for the first benchmark rate cut of 2025 would be the May 7 Fed meeting.
The Fed’s decision to pause rates is likely to have immediate effects on consumer borrowing costs. And with the mortgage rate environment still elevated, borrowers may be wondering how mortgage rates, in particular, will respond to the Fed’s move. So will the Fed’s rate pause be beneficial for mortgage rates, or will other factors continue to drive borrowing costs higher?
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Is the Fed interest rate pause good for mortgage rates?
It’s important to understand that the Fed’s decision to pause rate cuts will not directly impact mortgage rates. Mortgage rates are actually driven by a range of factors, including the Fed’s rate changes. This week’s Fed rate decision does, however, have a big influence on where mortgage rates could head.
That’s because mortgage rates tend to track the 10-year Treasury note yield, which moves based on investor expectations about inflation, Fed policy and economic growth. When the Fed signals that rates will remain steady, it can create more certainty in bond markets, which could help stabilize mortgage rates. If investors interpret the pause as a sign that inflation remains stubborn, though, it could keep Treasury yields higher, maintaining upward pressure on mortgage rates.
One scenario where the Fed pause could benefit mortgage rates is if financial markets perceive the Fed as having done enough to control inflation. For example, if investors believe inflation will continue trending lower without additional rate hikes, demand for government bonds could increase, driving down Treasury yields and, consequently, mortgage rates. This would be a welcome relief for homebuyers who have faced steep borrowing costs in recent years.
On the other hand, if inflation remains persistent and economic data continues to show strength, mortgage rates might not come down meaningfully in the short term. In this case, investors could start to doubt that the Fed will cut rates as early as May, keeping bond yields elevated and limiting any decline in mortgage rates. Or, if the labor market remains tight and consumer spending stays robust, lenders might be hesitant to lower mortgage rates significantly out of fear over continued inflation pressures.
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What other factors could impact the mortgage rate environment?
While Fed policy influences the general direction of interest rates, mortgage lenders ultimately set their rates based on various market factors and business considerations. Each lender maintains a unique pricing model and risk assessment criteria, which is why mortgage rates can vary significantly between lenders even on the same day.
The secondary mortgage market also plays a crucial role in determining mortgage rates. Most mortgages are eventually sold to investors through this market, and the pricing of mortgage-backed securities directly influences the rates lenders can offer. For example, when investor demand for these securities is high, lenders can typically offer lower rates. When demand drops or investors require higher yields, though, mortgage rates tend to rise.
Lender capacity and competition can also affect mortgage rates. During periods of high refinance or purchase activity, some lenders might raise rates to manage their pipeline of applications. A lender’s operating costs, profit margins and local market competition also factor into their rate-setting decisions, which is why shopping around among different lenders can often lead to better rates for borrowers.
The bottom line
While homebuyers and those looking to refinance may be hopeful that the Fed rate pause will drive down mortgage rates, that’s unlikely to happen, at least not in the short term. That doesn’t mean mortgage rates will stay stagnant, though. The mortgage rate environment is influenced by multiple complex factors beyond just Fed policy, so while the central bank’s decisions play an important role, borrowers should also keep a close eye on inflation trends, Treasury yields and overall economic conditions when trying to gauge where rates might head next.
