The Federal Reserve’s recent decision to adjust its 2025 rate cut projections has led to a notable increase in mortgage rates. Although the Fed’s cut in its funds rate by 25 basis points on Wednesday was anticipated, the subsequent adjustment from four to two projected cuts intensified market reactions due to lingering inflation and policy uncertainties.
Underneath the surface, the Fed’s announcement of planning just two rate cuts in 2025, rather than the expected three, reflects deeper concerns. Despite aligning with futures market forecasts before the meeting, the reduction in anticipated cuts surprised many investors. This shift caused futures markets to lower expectations to a single cut and drove mortgage rates higher.
The Federal Reserve’s tendency to implement gradual policy changes aims to avoid market destabilization. Their recent move from projecting four cuts to two in 2025 without hesitation sparked fears that the actual outcome might be even less. The individual projections indicated that 14 out of 19 Fed participants expect two or fewer cuts, underscoring this cautious sentiment.
Additional concerns arise from the Fed’s updated inflation projections. Participants are increasingly wary that inflation could exceed current expectations. Previously, only a small fraction voiced these concerns; now, a majority highlight the risks leaning towards higher inflation. This added dimension suggests the central bank foresees a scenario with potentially fewer rate reductions than officially forecasted.
Chair Powell has addressed potential responses to varying economic policies, particularly concerning import tariffs. Analysis from 2018 on tariff policy suggested a ‘see-through’ approach; however, Powell indicated the Fed would evaluate the appropriateness of this response should new tariffs emerge. The prospect of maintaining elevated rates forms part of this strategy until clear data suggests a weakening economy or shifts in administration policy direction.
Despite the official decisions, the Fed’s forecast is often subject to significant variation as new data inform policy moves. Presently, mortgage rates remain on an upward trajectory, coinciding with a rise in 10-year treasury yields, which increased by roughly 10 basis points following the Fed’s announcement.
The Federal Reserve’s adjusted projections indicate a cautious stance towards future rate cuts amid persistent inflationary pressures. While mortgage rates have reacted swiftly to these changes, the unfolding economic conditions and policy adjustments will continue to shape the financial landscape. Observers should remain vigilant as further data becomes available, which may influence future rate expectations.
Source: Redfin
