How the November Fed meeting could impact mortgage rates

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• The Fed is expected to cut the federal funds rate by 25 basis points this week. But mortgage rates are unlikely to fall in response.
• Strong economic data and fears of a resurgence in inflation have pushed mortgage rates higher lately.
• As long as the Fed continues to cut rates next year, mortgage rates should fall in 2025.

The Federal Reserve is expected to announce Thursday that it will cut the federal funds rate by 25 basis points, following a 50 basis point cut at its September meeting.

Many people expect mortgage interest will fall if the Fed cuts interest rates. But that’s not real how the relationship between mortgages and the Fed works. And right now, there are other forces keeping mortgage rates high, even as the Fed prepares to cut rates again.

A Fed cut is unlikely to have much impact on mortgage rates

Mortgage rates often go up or down in anticipation of expected measures from the Fed. But once market expectations are set, they generally don’t change unless the Fed surprises everyone.

“The market is basically fully pricing in a 25 basis point cut,” said Emanuel Santa-Donato, senior vice president and chief market analyst at Tomo. “Markets only react when they get things differently than they expect.”

Investors will also be closely watching Fed Chair Jerome Powell’s press conference after the meeting for clues about what the central bank might do at future meetings. Any change from the current outlook, which is that the Fed will continue to slowly cut rates through the rest of this year and into 2025, could cause mortgage rates to fluctuate.

“Any additional guidance could move mortgage rates, but the reduction itself won’t really make any difference one way or another,” Santa-Donato said.

Why mortgage rates are so high now: the economy, the Fed and the elections

Santa-Donato says one of the most important factors currently affecting mortgage rates is not the upcoming Fed meeting, but rather market expectations of high inflation now Former President Donald Trump has won the presidency.

“The market has increasingly priced in a Donald Trump victory and a Republican victory over the past month, and the market believes, based on the policies that party has set, that this will be the most inflationary outcome,” he says.

Moreover, the economy has been surprisingly resilient this year, changing investor expectations about future Fed cuts. Selma Hepp, chief economist of KernLogicsays markets initially overestimated how much the Fed would cut rates after September’s 50 basis point cut.

“We had that initial 50 basis points and I think at that point the markets might have expected you to have more,” Hepp says. “But when the jobs report and the inflation report came in, there was kind of a step back in realizing that things are still not falling off the cliff and we still have a very strong economy.”

We could see mortgage rates fall next year if the Fed continues to cut rates

The Fed is expected to continue cutting rates next year, which should help Mortgage interest rates go down in 2025. But how much they will fall depends on the economy, whether the labor market cools further and how inflation develops.

“I think mortgage rates will come down, maybe not as much as we had hoped,” Hepp says. “I think 6% might be the kind of benchmark around which mortgage rates will fluctuate, while we were hoping to get to maybe 5.5% to 5.75% by the end of next year.”

If inflation picks up again, it could keep interest rates at current levels or even increase them further.

“If the federal government promotes an inflationary policy, the Fed’s response could be to raise rates and try to get that inflation under control,” says Santa-Donato. “That would push mortgage rates up.”

What this means for home buyers and homeowners

Although mortgage rates are high and will likely remain high until the end of this year, it may still be worth it buy a house now if you’re ready.

Hepp points out that buyers can often get better deals on homes in the winter. So even though you may not get a low mortgage rate, you can find a cheaper home to offset a higher rate.

“The winter season is typically slower with less competition and sellers may be more willing to offer discounts,” Hepp says. “Because if they haven’t taken their house off the market, they’re more likely to get a discount because at that point it means they really have to sell.”

And as interest rates fall next year, more homeowners will have the opportunity to refinance and lower their rates mortgage payments.