What December’s Fed meeting means for mortgage rates in 2025

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• The Fed expects fewer interest rate cuts and higher inflation in 2025.
• Mortgage rates are unlikely to fall as much as expected next year. In the short term they could even rise.
• Next year, interest rates could hover in the mid-6% range, only a slight decline from current levels.

The Federal Reserve announced at the end of its December meeting that it would cut interest rates by another 25 basis points. This cut came as no surprise to investors and is not expected to have a major impact on mortgage rates. But another piece of information that emerged from the Fed’s latest meeting could impact how much mortgage rates will fall next year – if they fall at all.

At this meeting, new economic forecasts were presented, including the Fed’s famous “dot plot,” a chart that shows where Fed policymakers believe the federal funds rate will go in the future.

In previous economic forecasts, policymakers expected four rate cuts in 2025. But in their December forecasts they now only assume two cuts next year. They also expect inflation to take longer to reach its 2% target.

Which means fewer Fed rate cuts for mortgage rates

Although mortgage rates are not directly affected by changes in the federal funds rate, they are expected to decline in 2025 as the Fed continues to cut its key interest rate. So what does it mean that the Fed may now cut interest rates less than expected?

Mortgage interest rates are likely to rise slightly in the short term. And they are only expected to fall slightly in 2025.

“Mortgage investors are now demanding higher yields as inflation growth expectations have changed,” said Emanuel Santa-Donato, senior vice president and head of the capital markets team at Tomo.

Inflation, the Fed and uncertainty about the next government

It’s also possible that the Fed won’t be able to deliver even the two expected rate cuts next year.

Rodney Ramcharan, an economist and professor of finance and business administration at the USC Marshall School of Business, believes such cuts are unlikely.

“The reason for this is that inflation continues to be above target. The new government is likely to pursue an inflation program that can increase inflation by another perhaps 20 to 30 basis points,” says Ramcharan. “That’s why it’s hard to see how and where these cuts will come from.”

Many economists have identified certain policy proposals from President-elect Donald Trump as potentially inflationary, particularly his proposed tariffs. If inflation begins to rise in response to the new administration’s policies, the Fed could choose to keep interest rates stable. Or it could be forced to raise interest rates.

Fed officials have said they expect inflation to continue to fall, although it may take longer than initially expected.

Ramcharan says it’s difficult to know where inflation will go and it’s possible the Fed will have to raise interest rates next year to combat inflation.

“The problem with the uncertainty and volatility of the new government is that it then causes economic policy to swing back and forth,” he says.

What does this mean for homebuyers?

Unfortunately for homebuyers, mortgage rates are unlikely to fall enough to significantly improve affordability in 2025.

“The market is not forecasting a significant decline in mortgage rates,” Santa-Donato says. “So from a homebuyer’s perspective, there’s really no reason to wait for interest rates to go down anymore.”

Santa-Donato points out that many forecasters expect mortgage rates to hover in the mid-6% range next year. According to Freddie Mac, 30-year mortgage rates were at 6.60% last week.

When thinking about buying a home, it’s generally better to think about how home ownership fits your lifestyle and finances rather than trying to time the market to get the best price. And as we head into 2025, it looks like waiting for better mortgage rates will become even more pointless.

If purchasing a home is on the horizon for you, you can still improve affordability on an individual level by shopping around and getting quotes from more than one mortgage lender. The best mortgage lenders offer low interest rates, minimal fees, and other beneficial features that can make the process even more affordable. Many lenders now offer things like down payment assistance or closing cost loans, which can lower your out-of-pocket costs.

Molly Grace

Mortgage Reporter