Fed cuts rates, but resets expectations for 2025
Look for just two cuts next year — half the number previously forecast — as the Federal Reserve predicts inflation will remain high.
Key points:
- The Federal Reserve cut interest rates by a quarter percentage point at its December meeting, as most analysts expected, but noted the decision was a “closer call.”
- Concerns about inflation are prompting the Fed to dial back expectations on deeper cuts, but Chair Jerome Powell said we’re still “in a really good starting place.”
- Even with today’s cut, mortgage rates are expected to remain elevated in the coming weeks and stay in the 6% range in 2025.
As expected, the Federal Reserve announced another rate cut today, but appears to be reigning in plans to be more aggressive in 2025.
The Fed cut rates by a quarter percentage point on Dec. 18, putting the target interest rate at 4.25%-4.5%. The cut was widely expected by investors, as recent labor and inflation reports didn't raise alarm bells. It's the third straight cut by the Fed, which has lowered the target rate by a total of 100 basis points since September.
Inflation still the main culprit: During a press conference following the announcement, Fed Chair Jerome Powell said that while inflation has fallen significantly in the past year, it remains elevated. He added that it was a "closer call" to cut rates in December, with more debate among the Federal Reserve presidents and one vote against the cut.
But the labor market continues to cool, which Powell cited as a factor in the decision to make rates slightly less restrictive.
Fewer cuts expected next year: Based on expectations that inflation will be modestly higher in 2025, the Fed is now forecasting just 50 basis points in cuts, suggesting two quarter-point cuts for the year. Back in July, the Fed's outlook was for one 25-point cut in 2024 and then another 100 points in cuts in 2025. Even with the larger cuts this year, some analysts, including NAR Chief Economist Lawrence Yun, still predicted the Fed would stick with four cuts in 2025.
While resetting expectations, Powell offered a positive spin: "We're actually in a really good starting place here," he said in reference to the economy. And, he added, the Fed has room to maneuver depending on the impact of possible tariffs and other policies announced by President-elect Donald Trump — something many believe could lead to higher inflation.
The stock market reacted negatively to the announcement, falling more than 1,100 points in the final hour of trading.
What this means for mortgage rates: Bright MLS Chief Economist Lisa Sturtevant noted that the impact of interest rates on mortgage rates have been unpredictable lately, so treasury yields are being more closely watched. Right after the Fed's announcement, treasury yields rose.
"We could see mortgage rates increase slightly this week even after today's rate cut announcement," Sturtevant said.
Mortgage rates have already been ticking higher in recent days, according to Mortgage News Daily. On Thursday morning, prior to the Fed announcement, 30-year mortgage rates were averaging 6.93%, up from 6.82% at the beginning of last week.
With the expectation that mortgage rates will remain in the 6% range for another year, consumers are starting to adjust to the new normal, said Yun. He believes other factors will get the housing market back on track.
"Jobs and inventory will drive home sales," Yun said.