Will Mortgage Rates Go Down After Fed’s Next Meeting in May 2025?

If you're wondering where mortgage rates are headed and what the Fed's upcoming meeting on May 7, 2025, means for you, here's the deal: While most experts believe the Fed will hold steady on rates at the next meeting, the future is still uncertain. Although financial markets are anticipating rate cuts later in the year, the relationship between the Fed's actions and mortgage rates isn't always direct. Several factors, like inflation and economic policy, also play a huge role. So, predicting exactly what will happen with mortgage rates is tricky, but let's break down the key factors influencing them.

Have you been watching mortgage rates like a hawk, hoping for a dip so you can finally buy that dream home or refinance your existing one? You're not alone! It feels like a constant guessing game, especially with the Federal Reserve (the Fed) making moves that ripple through the entire economy. I know firsthand how stressful this can be, having helped friends and family navigate the confusing world of mortgages. So, let’s dive deep into what's happening, what the experts are predicting, and, most importantly, what it all means for your wallet.

Will Mortgage Rates Go Down After Fed's Next Meeting in May 2025?

The Fed's Recent Actions and the May Meeting

The Fed, in simple terms, is like the central bank of the United States. One of its main jobs is to keep the economy stable by managing interest rates. They do this by setting the federal funds rate, which influences what banks charge each other for lending money overnight. This, in turn, affects other interest rates throughout the economy.

• The Fed held interest rates steady at their last two meetings (January and March 2025).
• Before that, they cut rates three times between September and December 2024, reducing the benchmark rate by a full percentage point.
• Prior to that, the Fed had kept its key rate at a historic 23-year high for 14 months.

What's expected for the May 7th Meeting?

Most analysts predict the Fed will likely maintain the current rate at the upcoming May meeting. CME Group's FedWatch Tool, which tracks market expectations, shows a very high probability of this. But here's where it gets interesting…

Looking further ahead into 2025:

• There are five more Fed meetings after the May gathering.
• Financial markets are currently pricing in almost a 75% chance of at least three 0.25-point rate cuts by the end of 2025.

Important Note: Always remember that these predictions are just that – predictions. The Fed makes decisions based on the latest economic data, and things can change quickly.

The Murky Relationship Between the Fed Funds Rate and Mortgage Rates

Okay, this is where many people get confused. It's easy to assume that when the Fed cuts rates, mortgage rates automatically go down too. And when the Fed raises rates, that mortgages go up. However, it’s not always the case.

Think of it this way: the Fed funds rate has a more direct impact on short-term interest rates, like those on savings accounts, credit cards, and personal loans. Mortgages, especially fixed-rate mortgages, are long-term loans, and their rates are influenced by a broader range of factors.

Factors Affecting Mortgage Rates:

• Inflation: Higher inflation usually leads to higher mortgage rates, as lenders demand a higher return to offset the declining value of the money they're lending.
• Consumer Demand: Strong demand for housing can push mortgage rates up, as lenders have less incentive to offer lower rates.
• Housing Supply: A shortage of homes for sale can also lead to higher rates.
• Economic Strength: A strong economy often leads to higher rates, as investors are more willing to take on risk.
• Bond Market (Especially 10-Year Treasury Yields): This is a big one. Mortgage rates tend to track the yield on the 10-year Treasury bond. When bond yields rise, mortgage rates usually rise as well, and vice-versa.

Here's why the Fed and mortgage rates can move in different directions: The bond market anticipates the moves that the Fed will make. As such, mortgage rates tend to align with the anticipated future moves of the Fed.

The bond market tends to be most sensitive to inflation data, employment data, and housing market data, as well as any anticipated changes to government regulations.

Real-World Example: In the last quarter of 2024, mortgage rates increased despite the Fed cutting rates in September, November and December. This is evidence of the fact that the bond market is more important than the Fed Funds Rate.

Tariffs, Trade Wars, and Uncertainty: Throwing a Wrench into the Mix

Remember President Trump's tariff policies? Those kinds of things can really shake up the economy and, as a result, the mortgage market.

• Initial Impact: When tariffs were first announced, the stock market dropped, causing bond yields to fall and mortgage rates to decline temporarily.
• Longer-Term Impact: The uncertainty created by tariffs and potential trade wars can send bond yields much higher, causing mortgage rates to surge.

As you can see, even something seemingly unrelated to housing can have a significant effect on mortgage rates.

The Importance of the Fed's “Dot Plot” and Inflation Readings

The “dot plot” is a chart released by the Federal Reserve that shows where each member of the Federal Open Market Committee (FOMC) expects the federal funds rate to be in the future. It's essentially a forecast of where the Fed thinks rates are headed.

The dot plot is released quarterly. It is important to watch to gain insights into the future of mortgage rates.

Here's why the dot plot and inflation readings are important:

• Market Expectations: What the market expects to happen with the Fed rate is often more impactful on mortgage rates than where the federal funds rate is right now.
• Inflation's Influence: If inflation rises significantly, the Fed may be hesitant to cut rates, even if they had previously signaled they would.

Navigating the Uncertainty: My Advice

Given all this uncertainty, what should you do if you're looking to buy a home or refinance your mortgage?

• Don't try to time the market perfectly. Trying to predict exactly when rates will hit their lowest point is nearly impossible.
• Focus on your financial situation. Make sure you have a solid down payment, a good credit score, and a comfortable debt-to-income ratio.
• Shop around for the best rates. Don't just settle for the first offer you receive. Get quotes from multiple lenders to see who can give you the best deal.
• Consider different loan options. Explore different mortgage types (e.g., fixed-rate, adjustable-rate, FHA, VA) to see which one best fits your needs.
• Talk to a mortgage professional. They can help you understand your options and guide you through the process.

For what it is worth, I would be more concerned with the broader economic picture. Is the American economy on a sound footing? If not, can the economy withstand another shock like a pandemic, war, or global financial crisis? Your personal economic situation should be a reflection of these broader factors.

Staying Informed

Keep an eye on the following:

• The Fed's statements and meeting minutes.
• Inflation reports (e.g., the Consumer Price Index).
• Economic data releases (e.g., jobs reports, GDP growth).
• News and analysis from reputable financial sources.

By staying informed and working with qualified professionals, you can make smart decisions about your mortgage and achieve your homeownership goals, regardless of what the Fed does or what the market throws our way.