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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.
TAKE THE INMAN INTEL INDEX SURVEY FOR JANUARY
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. Bets placed by futures markets investors suggest there’s a 60 percent of at least two rate cuts totaling half a percentage point by the end of this year.
Economists at Pantheon Macroeconomics think the economy is decelerating more rapidly than some investors think, and predict the Fed will cut short-term rates four times by the end of the year, by a full percentage point in total.
Samuel Tombs
“Our view remains that payroll growth will slow further in the first half of this year, as still-high borrowing costs and heightened economic policy uncertainty weigh on private-sector hiring, catch-up growth in healthcare and education payrolls fades and a managed decline in federal government employment begins,” Pantheon Chief U.S. Economist Samuel Tombs said in a note to clients.
In the meantime, Fed policymakers said they will continue to let up to $25 billion in maturing Treasurys and $35 billion in mortgage-backed securities (MBS) roll off the central bank’s books each month.
Fed ‘quantitative tightening’
Source: Board of Governors of the Federal Reserve System, Federal Reserve Bank of St. Louis.
After the 2007-2009 Great Recession and during the pandemic, the Fed brought long-term interest rates down by buying trillions in government debt and mortgages. The Fed’s cumulative Treasury and MBS holdings peaked at $8.5 trillion in May 2022. Since then the central bank has trimmed $2 trillion in assets from off its books.
At $2.23 trillion as of Jan. 22, the Fed’s MBS holdings are down 19 percent from $2.74 trillion in April 2022.
In the long run, the Fed wants to offload most of its mortgage debt and hold mostly Treasurys. But because homeowners have little incentive to refinance mortgages taken out when rates were near historic lows, the Fed has only been able to trim its MBS holdings by about $15 billion a month by letting them passively roll off the books as they expire.
Selling MBS could help the Fed hit its $35 billion goal, Dallas Federal Reserve President Lorie Logan said in October. Selling mortgages could also put upward mortgage rates, but it’s not something policymakers are considering doing in the near term, Logan said.
Mortgage rates climb from 2024 lows
After hitting a 2024 low of 6.03 percent on Sept. 17, rates on 30-year fixed-rate conforming mortgages climbed above 7 percent in January for the first time since May 2024, according to rate lock data tracked by Optimal Blue.
Mortgage industry economists expect rates on home loans will remain elevated for the remainder of this year, with little chance that sales of existing homes will come charging back after hitting the lowest level in 30 years in 2024.
In December, economists at mortgage giant Fannie Mae economists were predicting that rates on 30-year fixed-rate mortgages would fall to 6.2 percent by the end of this year and to 6.0 percent next year.
But because of the runup in mortgage rates during the fourth quarter of 2024 and the fading prospect of aggressive Fed rate cuts, Fannie Mae forecasters now expect mortgage rates will still be averaging 6.5 percent in Q4 2025 before dropping to 6.3 percent by Q4 2026.
A weekly survey by the MBA showed applications for purchase loans were down 7 percent last week when compared to a year ago, while requests to refinance were up 5 percent.
Eric Orenstein
“The Fed’s pause on rate cuts confirms what Treasury yields have been telling us — inflation risks are likely to keep mortgage rates high in the near term,” Fitch Ratings Senior Director Eric Orenstein said in a statement. “Mortgage refis could still pick up if long-term rates fall around 75 basis points, but there is clearly less momentum than there was even three months ago.”
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