Mortgage costs soar despite Fed's rate cut

The Federal Reserve updated its economic projections in December 2024, showcasing a rise in inflation expectations compared to previous estimates released in September. In the latest forecasts, the median projection for Personal Consumption Expenditures (PCE) inflation increased to 2.4% for 2024 and 2.5% for 2025, suggesting a shift in the central bank's outlook on inflation trends. Additionally, the central tendency for core inflation projections indicated a notable increase, emphasizing concerns about potential inflationary pressures in the economy during the upcoming years. Furthermore, while the Federal Reserve cut interest rates three times in 2024, the average 30-year fixed mortgage rates actually spiked, showing a disconnect between Fed policy and mortgage market responses. As of mid-December 2024, the 30-year fixed rate mortgage rose to 6.72%, following the announcement of the Fed's latest interest rate cut. Experts noted that mortgage rates are more heavily influenced by the yield on the 10-year Treasury note and expectations regarding government fiscal policies, rather than directly following the federal funds rate. This highlights the complex relationship between monetary policy and housing market conditions. The Federal Reserve's cautious stance has also led to mixed reactions from the bond market, with signals indicating fewer interest rate cuts expected in 2025. The Fed's so-called "dot plot" indicates a projected benchmark lending rate reduction to approximately 3.9% by the end of 2025, far lower than previously expected. This uncertainty about future rate cuts has contributed to volatility in the mortgage markets, as borrowers face rising rates despite the Fed's efforts to stimulate the economy through rate cuts. As concerns grow about rising inflation and tighter monetary policy, analysts predict homeowners seeking relief from high mortgage rates may be disappointed. Experts suggest that mortgage rates could hover between 6.5% and 7% for the foreseeable future, driven largely by the Fed's quantitative tightening measures and ongoing market dynamics. The interplay between the Fed's rate policies and the broader economic landscape continues to significantly impact homeowners and prospective buyers in the current housing market.