Tariff Troubles Push Federal Reserve to Hold Rates in May. What’s Next for Home Buyers?

Fed decides to hold in May

Although widely anticipated, the Federal Reserve didn't change the federal funds target range at its May meeting.

With the annualized pace of inflation still above its long-term goal of 2% and the Trump Administration's power consolidation causing social and economic turmoil, the central bank continued the wait-and-see approach.

“The Fed took a cautious stance due to inflationary pressures and the global economic uncertainty happening around tariffs and labor costs," said Tim Lawlor, chief financial officer at Kiavi. "While many are hoping for clear signals of rate cuts, the data remains too mixed to take decisive actions."

How will mortgage rates react to the Fed news?

Interest rates typically rise alongside increases to the fed funds rate and decline after cuts. However, mortgage rate movements varied in the immediate aftermath of the most recent Fed decisions.

The day following each of the last two rate cuts in November and December, the average 30-year fixed-rate mortgage (FRM) respectively decreased one (0.01%) basis point and jumped 12 (0.12%) basis points week-over-week, according to Freddie Mac. After January and March's rate holds, the 30-year FRM dipped one (0.01%) basis point and rose two (0.02%) points from the week prior.

Rates have moved within a relatively narrow band lately. The average 30-year FRM oscillated between 6.62% and 6.83% from March 6 to May 1. The third consecutive Fed hold will likely provide borrowers with more of the same in the near future.

"We expect mortgage rates to remain stable through May, though ongoing volatility in the bond market could introduce some short-term fluctuations," Lawlor continued. "Over the next few years, we anticipate mortgage rates will gradually decline as inflation stabilizes, but it's unlikely we will see the super-low rates we became accustomed to in years past."

In its post-meeting statement, the FOMC said economic activity keeps expanding "at a solid pace," with stable labor market conditions and unemployment numbers. It also noted that, "uncertainty about the economic outlook has increased further. The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen."

In 2025, inflation has progressed toward the FOMC's 2% goal, descending to 2.4% in March from 2.8% in February and 3% in January, according to the Bureau of Labor Statistics. However, it needs to be seen as sustainable for a cut to be called for. A Fed cut followed by decreasing mortgage rates would surely be a welcome sign for house hunters, many of who have been sidelined due to being priced out of the marketplace.

The Fed’s role and May's FOMC meeting

In a unanimous vote at its May meeting, the Federal Open Market Committee (FOMC) kept the federal funds target range steady. This decision marks the third straight hold, most recently following January and March.

In addition to maintaining the fed funds rate, the FOMC will continue its reduction of Treasury securities, mortgage-backed securities and agency debt. Per usual, the FOMC gave the caveat that it would "carefully assess incoming data, the evolving outlook, and the balance of risks" for determining additional policy adjustments.

The U.S. annualized inflation rate hit a 41-year high of 9.1% in June 2022 and the Fed started taking action to combat it. Inflation mostly followed a downward trajectory since, ranging between 2.4% and 3.5% over 2024 and the first quarter of 2025. Although the inflation rate came down from at 3% in January to 2.4% in March, it remains above the Fed's long-term goal of 2%.

“The FOMC held the federal funds rate target steady at its May meeting, dismissing the negative first-quarter GDP reading as solely due to volatility in international trade flows but noting that risks to its inflation and employment targets have increased given the heightened policy uncertainties," said Mike Fratantoni, chief economist at the Mortgage Bankers Association.

“MBA forecasts that the risks to growth and the job market will wind up being the bigger concern this year, which will lead the Fed to resume cutting short-term rates in the second half of the year. Until then, the hard data on inflation and unemployment will continue to drive interest rates, including mortgage rates, from one end of a trading range to the other, with only a slight downward trend in mortgage rates over the remainder of 2025."

A bevy of factors — not just the Fed — influence mortgage rates. While the central bank technically doesn't set mortgage interest rates itself, its policy actions do intrinsically correlate with mortgage rate movements. The next FOMC meeting will take place on June 17-18, 2025.

Should you lock in a mortgage rate?

Since multiple economic and geopolitical factors impact mortgage rates, they're subject to high volatility — especially in volatile times.

Although projections can (and do) shift with new information, the FOMC’s latest action signaled the economic forecast needs more stability and sustainable inflation cooling before another rate cut can be made. If the pace of inflation keeps slowing while employment remains healthy, additional cuts could be on the horizon.

"Focusing on long-term affordability and local market dynamics is always a better strategy than timing the market," Lawlor said. "If the numbers work now, it's worth consideration, especially given the potential for increased competition if/when rates begin to fall."

Regardless of where rates go, you should always negotiate and get creative in budgeting. Building home equity is one of the most common ways to gain wealth and biggest advantages of owning property.

If you’re ready to begin your path to homeownership, talk to a local mortgage professional to see what rates and loan types you qualify for.