On Wednesday, the Federal Reserve announced its Third rate cut in 2024. When the Fed decided to cut interest rates this fall because of cooler inflation, many prospective homebuyers thought: mortgage rates would go down immediately.

But mortgage ratesDriven by investor expectations and the bond market, the Fed does not directly set home loan interest ratesthough its monetary policy decisions help guide banks and lenders across the country.

of the Central Bank Summary of Economic Forecastswhich outlines interest rate forecasts for the coming months, indicates that the Fed still plans to cut rates next year. However, given persistent inflation and the expectation that price pressures will remain high, 2025 is likely to be only two 0.25% rate cuts.

After his meeting on Wednesday, Fed Chairman Jerome Powell said: "We still see ourselves on track to cut, but it will depend on the data."

Unfortunately for prospective homebuyers, that forecast is likely to keep upward pressure on bond yields and mortgage rates for the foreseeable future, it said. Nicole RuthSVP of the Rueth team powered by Movement Mortgage.

Here's what you need to know about how the government's interest rate policy is affected mortgage rates.

What does the Federal Reserve do?

The Fed was created 1913 Federal Reserve Act set and control US monetary policy to stabilize the economy. Consisting of 12 regional banks and 24 branches, it is governed by a board of governors who are voting members of the Federal Open Market Committee. The FOMC sets the benchmark interest rate at which banks borrow and lend their money.

In inflationary conditions, the Fed uses interest rate hikes to slow economic growth and make borrowing more expensive. Banks typically pass rate hikes on to consumers in the form of higher interest rates on longer-term loans, including home loans. When the economy is in a recession or recession, the Fed is cutting interest rates to boost consumer spending and spur growth.

Read more. How jobs data could affect mortgage rates in 2024

How does the Fed affect mortgage rates?

The Fed does not directly set mortgage rates, but it does affect them by making changes to the federal funds rate, the rate that banks charge each other for short-term loans. which in the long run has a domino effect on mortgage rates and the broader housing market.

"When the Fed raises interest rates to slow the economy, interest rate-sensitive sectors such as technology, financials and housing are usually the first to feel the impact," he said. Alex Thomassenior research analyst at John Burns Research and Consulting.

It's important to monitor the Fed's actions. Its decisions affect your money in several ways, including the annual interest rate on your credit cards, the yield on your savings accounts, and even your stock market portfolio.

What is the outlook for Fed rate cuts and mortgage rates?

If the Fed cuts interest rates further in 2025, mortgage rates should gradually decrease. However, the timing of those cuts, along with the economic data we get between each policy meeting, will determine how quickly (and by how much) mortgage rates can fall.

The next administration's economic policies are likely to prompt the Fed to back off from President-elect Donald Trump's rate easing tax and tariff reduction proposals could boost demand, increase the deficit and push back inflation, giving the Fed an incentive to keep interest rates on hold for longer.

Powell said it was too early to say how Trump's economic agenda and the Republican-led Congress might change the central bank's approach to adjusting interest rates, citing only the need to proceed with caution. experts say the central bank is likely to hold off on cutting interest rates, delaying further policy changes until at least March.

While much is still uncertain, it will be difficult for 30-year fixed-rate mortgages drop below 6% without weaker economic data and continued Fed tapering.

What Factors Affect Mortgage Loans?

Mortgage rates Moving for the same reasons that happen for home prices: supply, demand, inflation, and even occupancy levels, the individual mortgage rate you qualify for is determined by personal factors such as your credit score and loan amount.

Economic factors that affect mortgage rates

• Policy changes from the FedWhen the Fed adjusts the federal funds rate, it affects many aspects of the economy, including mortgage rates. to profit from consumers.

• inflation: In general, when inflation is highmortgage rates tend to be high.As inflation cuts into purchasing power, lenders charge higher loan rates to make up for that loss and make a profit.

• Supply and demand. When mortgage demand is high, lenders tend to raise interest rates because lenders only have so much capital to provide in the form of home loans. Conversely, when mortgage demand is low, lenders lower interest rates to attract borrowers.

• Bond marketMortgage lenders tie fixed interest rates, like a fixed-rate mortgage, to bond rates , the bond is worth less in the market where investors securities are bought and sold, causing mortgage rates to rise.

• Other economic indicatorsEmployment patterns and other aspects of the economy that affect investor confidence and consumer spending and borrowing also affect mortgage rates.Example: a strong jobs report and a strong economy can indicate greater demand for housing, which can put upward pressure on mortgage rates.When the economy slows and unemployment is high, mortgage rates tend to be lower.

Personal factors that affect mortgage rates

Specific factors that determine your particular mortgage rate include:

Now is a good time to shop for a mortgage.

While timing is everything in the mortgage market, you can't control what the Fed does.

You can get best rates and terms available by making sure your financial profile is healthy by comparing terms and rates from multiple lenders.

Regardless of the economy, the most important thing when shopping for a mortgage is to make sure you can comfortably afford your monthly payments.

"Buying a home is the biggest financial decision a person will make," said Cushi. If you've found a home that fits your lifestyle needs and budget, buying a home can make financial sense in today's housing market, Cushi noted.

If you're overpriced, it's better to wait. "Sitting on the sidelines can allow a potential buyer to continue to pay off their debt, build up their credit and save on down payment and closing costs," he said.

Bottom line:

When the Federal Reserve adjusts the benchmark interest rate, it indirectly affects mortgage rates. The Fed's rate cuts will help improve home loan rates, though it won't be immediate. Mortgage rates will also respond to inflation, investor expectations and the broader economic outlook predict that mortgage rates should slowly decline over the next year.

If you're shopping for a mortgage, compare rates and terms offered by banks and lenders. The more lenders you interview, the better your chances of securing a lower mortgage rate.

Additional home buying tips.