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Federal Reserve policymakers left short-term interest rates untouched at their first meeting of the year Wednesday and continued “quantitative tightening” that’s also helping keep long-term interest rates elevated by allowing billions of dollars in Treasurys and mortgages to roll off the central bank’s books each month.
Mike Fratantoni
Fed policymakers are seeing “solid growth, a strong job market, and inflation still above the Fed’s target,” Mortgage Bankers Association Chief Economist Mike Fratantoni said in a statement.
After bringing short-term rates down by a full percentage point in 2024, the Fed’s decision to keep its target for the federal funds rate at between 4.25 percent and 4.5 percent was seen as a given by economists and bond market investors.
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Yields on 10-year Treasury notes, a barometer for mortgage rates, were up three basis points Wednesday afternoon, while rates on 30-year fixed-rate mortgages tracked by Mortgage News Daily fell one basis point. A basis point is one-hundredth of a percentage point.
Selma Hepp
CoreLogic Chief Economist Selma Hepp agreed that the economy “continues to be resilient against long-term economic setbacks, which means that the Fed is in no imminent need to continue its rate cuts.” With the economy expected to keep growing at 2 percent or more, “the case for further monetary loosening in the coming months is increasingly less compelling.”
With progress in bringing inflation down to the Fed’s 2 percent goal having slowed in recent months, mortgage rates have been on the rise. The question for investors who fund most mortgages has become whether, and by how much, the Fed might cut rates at its seven remaining meetings this year.
Fratantoni said every word from Fed policymakers’ upcoming speeches “will be closely parsed to determine whether this is just a pause before another cut or two or whether this level of the federal funds rate will be the low point for this cycle.”
He said the MBA is forecasting only one rate cut this year, and “with the Fed on hold, we do expect that longer-term rates, including mortgage rates, will also stay within a narrow range for the foreseeable future.”
A wild card in such interest rate forecasts is that tariffs, deportations and tax cuts proposed by the Trump administration could prove to be inflationary.
At a press conference following the conclusion of the Federal Open Market Committee’s two-day meeting, Fed Chair Jerome Powell said forecasts are always “highly uncertain in both directions.”
“In the current situation, there is probably some elevated uncertainty because of significant policy shifts in … tariffs, immigration, fiscal policy and regulatory policy,” Powell said. “So, there is probably some additional uncertainty, but that should be passing. We should go through that, and then we will be back to the regular amount of uncertainty.”
The Bank of Canada on Wednesday cut-short term rates by 25 basis points, to 3 percent, and ended its quantitative tightening program.
Although the bank’s latest economic projections are “subject to more-than-usual uncertainty because of the rapidly evolving policy landscape, particularly the threat of trade tariffs by the new administration in the United States,” the scope and duration of a potential trade war are impossible to predict, Bank of Canada policymakers said.
Trump has said high interest rates hurt the economy, and last week said he will demand that the Fed keep bringing rates down.
“With oil prices going down, I’ll demand that interest rates drop immediately,” Trump said Jan. 23 in remarks he delivered remotely to the World Economic Forum in Davos, Switzerland.
After Wednesday’s Fed meeting, Trump took to social media to complain that “Jay Powell and the Fed failed to stop the problem they created with inflation,” and promised to tackle the problem by “unleashing American energy production, slashing regulation, rebalancing international trade, and reigniting American manufacturing.”
Powell, a Trump appointee, said he’s not spoken to Trump recently and he would not “have any response or comment whatsoever on what the President said. It is not appropriate for me to do so. The public should be confident that we will continue to do our work as we always have, focusing on using our tools to achieve our goals, and keeping our heads down and doing our work.”
Asked if a March Fed rate cut might still be in the cards, Powell said, “The economy is strong, the labor market is solid, and the downside risks to the labor market appear to have abated. Disinflation continues on a sometimes slow and bumpy path. That tells me and other members of the committee … we don’t need to be in a hurry to adjust the policy stance.”
Futures markets tracked by the CME FedWatch tool on Wednesday put the odds of a March rate cut at just 22 percent, down from 32 percent on Tuesday and 50 percent on Dec. 27.
According to futures markets investors, there is a 60 percent chance of at least two rate cuts totaling half a percentage point by the end of this year. However, economists at Pantheon Macroeconomics believe that the economy is decelerating more quickly than some investors anticipate. They predict that the Federal Reserve will cut short-term rates four times by the end of the year, totaling a full percentage point. Pantheon’s Chief U.S. Economist Samuel Tombs attributes this forecast to slowing payroll growth in the first half of the year due to high borrowing costs, economic policy uncertainty, and other factors.
Despite these predictions, Fed policymakers have announced that they will allow up to $25 billion in maturing Treasurys and $35 billion in mortgage-backed securities to roll off their books each month. This strategy, known as “quantitative tightening,” aims to reduce the Fed’s balance sheet, which peaked at $8.5 trillion in May 2022.
The Fed’s MBS holdings have decreased by 19 percent since April 2022, but selling MBS could help the central bank achieve its target. However, policymakers are not currently considering selling mortgages, which could impact mortgage rates.
Speaking of mortgage rates, they have been on the rise since hitting a low in September 2024. Industry experts expect rates to remain elevated throughout the year, with Fannie Mae forecasting an average rate of 6.5 percent in Q4 2025. The recent slowdown in mortgage applications further underscores the impact of high rates on the housing market.
Fitch Ratings Senior Director Eric Orenstein points out that the Fed’s decision to pause rate cuts indicates that inflation risks are keeping mortgage rates high. While mortgage refinancing could increase if long-term rates decrease, there is less momentum in the market compared to a few months ago. When it comes to creating a successful WordPress website, it’s important to focus on creating unique and engaging content. By ensuring that your content is fresh and original, you can attract more visitors to your site and keep them coming back for more.
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