Will Mortgage Rates Go Down After the January Fed Meeting?

Will mortgage rates rise after the Fed meets?

The Federal Reserve will hold its next Open Market Committee meeting on January 28-29. Will it come with another rate cut? Or will the committee revert to keeping rates steady (or possibly even raise them)?

The annualized inflation rate remains above the Fed’s long-term goal of 2%, and increased every month in the fourth quarter, ending 2024 at 2.9%.

At its three previous meetings, the central bank made a cuts of 50 basis points in September and 25 basis points in November and December. What will economic indicators justify for the fed funds rate decision in January?

Will the Fed cut rates in January?

The FOMC is coming off three straight cuts to the federal funds rate. The central bank had waited for the economy to show sustainable softness before loosening its monetary policy in 2024.

Many experts anticipated more cuts and gradually descending interest rates in 2025. However, inflation has proven stubborn, growing through the final quarter of last year. This, and uncertainty surrounding financial policies of the incoming Trump administration, could put additional cuts on hold.

As the Fed’s job includes stabilizing the U.S. financial system and setting monetary policy, it’s responsible for maintaining a long-term inflation rate of 2%. Keeping inflation near that level keeps prices steady for consumers.

The annualized inflation rate started surging in 2021 and spiked to a 41-year high of 9.1% in June 2022, according to the U.S. Bureau of Labor Statistics. That year, the Federal Open Market Committee (FOMC) took action by hiking the federal funds rate to tame inflation.

The Fed adjusted its monetary tightening policy multiple times since then. Most recently, the central bank cut the fed funds rate by 50 basis points in September, and 25 basis points in both November and December. The latest inflation reading inched up for the third month in a row to 2.9% in December from 2.4% in September.

As the economy keeps expanding, market experts overwhelming predict the Fed to hold rates steady at its January meeting.

“Incoming economic data are likely to keep the Federal Reserve on hold for now, while uncertainties about economic policy are likely to keep longer-term rates, including mortgage rates, steady at these levels,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association.

Interest rate growth could continue

Interest rates rollercoastered throughout 2023 and 2024, with the average 30-year fixed mortgage ranging from 6.08% to 7.79%, according to Freddie Mac. Most recently, The average 30-year fixed rate mortgage reached 7.04% on Jan. 16.

Although the annualized pace of inflation fell from the last two years, it’s still above the Fed’s goal. Because of this, tightening monetary policies could always return until inflation gets brought down to a normalized level. Interest rates are notoriously difficult to predict but typically rise in response to Fed tightening.

Due to the rapid rate growth we saw in 2023, some lenders will allow you to lock in a rate for 90 days at little or no cost so you’re protected from higher rates if you don’t close quickly. A few examples of lenders offering this include AmeriSave Mortgage, Quicken Loans, and Rocket Mortgage.

Some lenders are even offering borrowers refinances without repeat lending fees or appraisal fees when rates eventually hit a down cycle. When mortgage shopping, be sure to ask your loan officer about these and potentially other services.

Mortgage rates and the Fed’s role

The Federal Reserve doesn’t determine mortgage rates. Instead, rates are intrinsically tied to the Fed’s actions. At its final meeting of 2024, the FOMC projected two 25-point cuts for this year, with the caveat that they will make policy adjustments as necessary.

The fed funds rate is the amount banks pay to borrow money from each other overnight and an increase signals higher inflation and economic expansion. Mortgage interest rates typically rise in response to growth in the fed funds rate.

How mortgage rates respond in the immediate aftermath of these FOMC meetings has been a mixed bag over the last year. Following the three most recent rate decisions, they decreased 11 (0.11%) basis points and one (0.01%) after September and November’s cuts, and jumped 12 (0.12%) points following December’s cut.

Advice for borrowers

Even if you missed out on the rock-bottom rates from the last couple years, they’re still below average historically and you can always refinance once they hit a down cycle. It’s also important to note that many people build wealth through home equity.

“Because mortgage rates tend to fluctuate, I always advise buyers to focus on their specific budget and needs rather than trying to predict economic factors,” said Nick Boniakowski, head of agent partnerships at Opendoor.

If you’re ready to become a homeowner, speak with a local mortgage lender to see what loans and interest rates you can qualify for ahead of January’s Fed meeting.