Fed’s rate cuts may not lower mortgage costs

In September, the Federal Reserve cut its benchmark interest rate for the first time in four years and then followed up with two more reductions, in November and December. Such cuts typically lead to lower borrowing costs for things like homes, cars and business loans.

But this time, things haven't played out that way. Some borrowing costs have actually risen since the Fed’s first rate reduction. The average U.S. 30-year fixed mortgage rate, for example, rose to 6.85% last week. That is well below the 7.8% peak it reached in November 2023. But it’s still significantly above the sub-5% rates that existed for more than a decade after the 2008-2009 financial crisis. After the 2020 pandemic, mortgage rates fell still lower, to roughly 3%.

Most analysts think mortgage rates are likely to remain elevated because financial markets increasingly fear that inflation could become stuck above the Fed’s 2% target. This month, the Fed reduced its projection of interest rate cuts in 2025 to just two, from the four it had envisioned in September.