By A.J. Kaufman, Managing Editor
At its last meeting, the Federal Reserve left interest rates unchanged, while warning of rising uncertainty over the direction of the economy, particularly the ongoing tariff agenda from the White House.
The Fed said its key federal funds rate would remain at about 4.5% and also reiterated it foresees no more than two rate cuts this year as it focuses more on controlling price growth.
The central bank lowered its forecast for 2025 on gross domestic product, a measure of the total value of all goods and services produced within the United States.
Nearly all its policymakers say there’s an increased risk that GDP will continue to shrink, and more than half believe the unemployment rate could climb as high as 4.5% this year. The Fed’s statement said in part, “Uncertainty around the economic outlook has increased.”
At a news conference after the statement was released, Federal Reserve Chair Jerome Powell said the dynamic between President Donald Trump’s tariffs and stronger near-term price growth was unclear given other economic trends. He did note that tariffs are a factor in rising expectations that price hikes will accelerate, though for now, he believes firmer inflation would most likely be “transitory.” But then in early April, Powell appeared to back away from that view, saying that “it is also possible that the effects could be more persistent.”
A host of indicators, including comments from Trump administration officials, suggest that consumer spending and employers’ hiring are slowing, particularly compared to an initial surge of optimism upon Trump’s election this winter.
All this creates new difficulties for the Fed to navigate as it sets borrowing rates and is charged by Congress with helping to keep unemployment and inflation low. Some have even noted the Fed’s latest outlook signals the prospect of stagflation — higher inflation despite lower overall growth — albeit nowhere near the tumult caused by the oil crisis of the 1970s.
During recent remarks to the Economic Club of Chicago, Powell expressed concern that the central bank could find itself in a dilemma between controlling inflation and supporting economic growth. In a question-and-answer session after his speech, he said tariffs are “likely to move us further away from our goals…probably for the balance of this year.”
The Chairman, who also said policymakers face a “challenging scenario,” gave no indication on where he sees interest rates headed at his May announcement, as well as June 18. For his part, Trump has tried to goad the Fed into quickly cutting interest rates to mitigate a slowdown.
What does this mean for mortgage rates?
They have been expected to possibly decline in 2025 as the U.S. economy slows, and the Federal Reserve cuts interest rates.
However, as of this late April writing, analysts expect the 30-year fixed mortgage rate to stay between 6% and 7% this year. With rates already dipping among certain entities, consumer sentiment dwindling, and falling expectations for future GDP, that could conceivably change. It simply is hard to predict the exact path amid heightened economic volatility.
Perhaps Powell said it best earlier this spring when claiming that “Forecasts are highly uncertain. Forecasting is very difficult. Forecasters are a humble lot with much to be humble about.”
Yes, an economic downturn, exacerbated by tariffs — and pauses on those tariffs — could send rates tumbling lower. Regardless, economists don’t anticipate a dip into the 3% or 4% range in the foreseeable future. This is all because mortgage rates fluctuate for a number of reasons: economic conditions, investor demand and Federal Reserve policy. It’s not a one-to-one relationship between the federal funds rate and mortgage rates.
More precisely, let’s close by looking at the feedback from two distinct entities.
In the group’s latest outlook, the National Association of Home Builders expects the 30-year mortgage rate to decrease to around 6.5% by the middle of 2025 and fall below 6% by the end of 2026.
Meanwhile, in the bank’s latest U.S. Economic Outlook, Wells Fargo expects rates to stay above 6.5% for the next two years.
No one knows for certain, but the Business Journal believes that if the Federal Reserve senses the economy and stock market begin to slow too much, or if unemployment begins to increase appreciably, it will eventually lower interest rates.
