Fed Pauses, But Mortgage Rates Are Already Lower

The Federal Reserve just voted to hold the federal funds rate steady, putting a wrap on its three-meeting streak of rate cuts and demonstrating the central bankers’ cautious confidence in the economy. The official statement noted that “in considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” In other words, they’re acknowledging uncertainty, but noting that the current situation is safe enough for a wait-and-see approach.

Mortgage interest rates have moved lower from late last summer through to the new year, often ahead of the Fed’s cuts. The central bankers’ latest announcement is unlikely to move mortgage rates, but more information about a potential purchase of mortgage-backed securities could.

Interest rates, mortgage or otherwise, aren’t technically the Federal Reserve’s top concern. The federal funds rate, which is the short-term borrowing rate the Fed actually sets, is the central bankers’ main tool for influencing economic activity.

The Federal Reserve has a dual mandate of supporting both maximum employment and price stability — essentially, keeping the labor market solid and inflation under control. The Fed uses the funds rate to push borrowing costs up or down in order to keep these goals in balance.

The central bankers taking a beat will allow them to see how 2025’s series of cuts is playing out. Recent data shows an economy that’s doing semi-okay: Though prices have continued to rise, inflation has been broadly in line with expectations, and while hiring’s been a bit weak, unemployment may be moderating.

“There remains a compelling case for easing,” Gay Cororaton, chief economist for the Miami Association of Realtors, commented via email. “Based on current data, the Fed still appears on track to cut the federal funds rate at least once this year.” But for now, there’s not a sense of urgency.

So if the Federal Reserve’s taking a time out, where did all those recent headlines about the lowest mortgage interest rates in three years come from? Well, the Fed is just one part of the economic ecosystem that drives mortgage rates. Combinations of different factors gel in ways that drive rates up or down in longer-term cycles.

Every now and then, however, we get an abrupt change that can be traced to a single source. That’s exactly what happened in early January, when President Trump called for the purchase of $200 billion in mortgage-backed securities (MBS). Even with scant details, this potential cash infusion drove average 30-year mortgage rates down to their lowest levels since September 2022.

MBS are bundles of mortgages that are similar to bonds. After a home loan is closed, the mortgage lender generally resells it to housing finance agencies Fannie Mae, Freddie Mac or Ginnie Mae. These entities pool similar loans together, creating mortgage-backed securities. Investors buy MBS and receive periodic payouts.

MBS are key to providing mortgage lenders with liquidity: Selling loans allows lenders to recoup their cash and be able to lend again much more quickly than if they held onto the mortgages and waited for homeowners to repay them. That’s also why news of a potential major MBS purchase drove mortgage rates down. When there’s a guaranteed buyer, mortgage lenders can offer lower rates.

Unfortunately for those hoping for even lower mortgage rates, that post-announcement plunge is already gone. “Without sustained, predictable buying, it’s hard to see that having a lasting effect on rates,” Realtor.com senior economist Jake Krimmel commented via email.

Mortgage rates are still relatively low; Freddie Mac’s weekly rate survey has reported an average below 6.3% since early October. This week, the average rate on a 30-year fixed-rate mortgage was 5.99% APR, according to rates provided to NerdWallet by Zillow.