The Federal Reserve kept interest rates unchanged at a range of 3.5% to 3.75% as central bank policymakers balance sticky inflation with a strong labor market.
Today’s decision to hold rates steady was widely anticipated, despite public pressure from President Donald Trump on his newly appointed Fed chair, Kevin Warsh, to deliver a rate cut.
Because the Fed’s vote to hold rates steady was in line with market expectations, the decision itself is unlikely to move bond yields or the mortgage rates that follow. Instead, what matters most is the Fed’s updated economic projections, which confirm that most policymakers now expect a rate hike later this year rather than a cut.
In fact, nine of 18 participants who submitted projections indicated that they think a rate hike is necessary this year, compared with eight who think rates should stay steady and one who foresees a rate cut.
“The overall tone is more hawkish than many had anticipated, and the immediate market reaction was an increase in rates,” says Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association, in a statement.
Keep reading to learn more about what today’s Fed decision means for mortgage interest rates — and what it doesn’t mean.
[See: Mortgage Rate Forecast: Predictions for the Housing Market]
Hawkish Meeting Puts Upward Pressure on Interest Rates
Although the Fed decided to hold rates steady, long-term interest rates are expected to rise. Why is that?
Long-term interest rates like those on mortgages track the yield on 10-year Treasury notes, not the Fed’s overnight financing rate. The bond market is highly sensitive to inflation. Bond investors demand higher yields when inflation is high, which pushes mortgage rates higher.
Now, the Fed is expecting sticky inflation, and it may be necessary to hike rates to combat it. Taken together, this all means that 30-year mortgage rates will stay high.
“MBA’s forecast is for mortgage rates to average about 6.5% over the forecast horizon, given the resilience in the broader economy and job market, the likely stance of monetary policy given persistent inflation, and ongoing fiscal pressures, which will keep upward pressure on longer-term debt,” Fratantoni says.
The Fed Changes Guard, but the Fed’s Goal Remains the Same
Today marks Kevin Warsh’s first meeting as Federal Reserve chair since being appointed by Trump in March and confirmed by the Senate in May. Although Trump has been putting substantial pressure on central bank policymakers in the past — notoriously railing on former Fed Chair Jerome Powell for keeping rates high for too long — the Fed chair doesn’t hold the absolute power to change rates.
The directive of the Fed chair, as the leader of the rate-setting Federal Open Market Committee, is to steer monetary policy. However, there are 12 voting members on the FOMC, and it takes a majority of them to set short-term interest rates.
The Federal Reserve has a dual mandate of maintaining stable prices and maximum employment. The power to move interest rates is the imperfect tool that the Fed has to serve that goal. Keeping rates too high can be unnecessarily restrictive, while keeping rates too low can lead to an overheated economy with runaway inflation.
Inflation is running at 4.2% annually, according to the May consumer price index report, which is double the Fed’s 2% target rate. On the other side of that equation, the labor market has proven surprisingly resilient, with the U.S. adding an unexpected 172,000 jobs in May, per the latest jobs report.
While the war in Iran — the leading driver of recent inflation — is effectively resolved after a peace deal, consumer prices won’t drop overnight. It will likely take time for inflation and interest rates to settle back to prewar levels.
More from U.S. News
Iran Peace Agreement Offers Hope for Lower Mortgage Rates This Spring
Think Today’s 6.5% Rate Is Painful? This Historical Mortgage Rates Chart Puts It Into Perspective
Mortgage Rate Forecast: Predictions for the Housing Market
Fed Holds Rates Steady: What the Decision Means for Mortgage Rates Moving Forward originally appeared on usnews.com
