The Federal Reserve announced an interest rate cut in September 2024, marking the end of constant rate hikes since 2020.
The announcement rebounded financial markets and lowered the cost of borrowing for consumers, raising hopes that mortgage rates could follow suit.
The board announced its approach to cutting interest rates in the coming years, and most experts predicted that frequent rate cuts would be on the horizon.
However, the year 2025 may look slightly different than initially anticipated due to some aggravating factors.
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Markets have begun to adjust to the likelihood of fewer interest rate cuts this year as the incoming Trump administration comes to power and its policy agenda takes effect.
Federal Reserve Chairman Jerome Powell has already indicated that he will not resign despite reported tensions between him and President-elect Trump. He has also suggested that the Federal Reserve would not directly include the effects of Trump's policies in its fiscal policy until after he takes office.
However, analysts note that inflation may be a bigger concern this year and will strongly influence interest rate levels.
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Inflation will persist and remain the Federal Reserve's top priority
In 2024, there were three consecutive rate cuts in four months, a stark contrast to four years of constant increases. although he The federal funds rate was 0.2% in 2022.it quickly rose to 5.33% in August 2023.
Although the Federal Reserve had initially forecast frequent rate cuts through 2025 and even 2026, it readjusted its projections in December. Powell noted that caution will be exercised in the future and that some A pause in rate cuts is expected. effective after the next January board meeting.
However, the Federal Reserve's fiscal policy is driven by a balance between stable consumer prices, maintaining economic performance, and promoting high levels of employment. Inflation and labor market performance are the factors that most influence interest rate levels.
More on interest rates:
- The Surprising Reason Mortgage Rates Are Rising Despite Interest Rate Cuts
- Fed Chair Jerome Powell warns of inflation, weak housing market
- Dave Ramsey Shares Important Mortgage and Interest Rate Strategy Now
Greg McBride, chief financial analyst at Bankrate, shared predictions about what to expect from the Federal Reserve this year.
“Persistent inflation and economic growth that surprised to the upside in 2024 will give way to persistent inflation and slower, still strong economic growth in 2025,” he wrote in a statement. “I'm forecasting three interest rate cuts for the year, which will bring the federal funds rate to 3.50% – 3.75% by the end of the year.”
Although the Federal Reserve may act cautiously early in the year, further interest rate cuts are very possible, especially if inflation slows.
Continued market volatility is on the horizon
While the stock market changes frequently, bonds are considered safer and more predictable investments. Investors often turn to bonds, certificates of deposit (CDs), money markets, and Treasury notes for a more stable, guaranteed return when stocks perform inconsistently.
However, consumers may need to rethink their investment approach in a high-risk environment.
McBride also anticipates that stocks and fixed income (a historically safe and stable product) will be less predictable this year. However, this volatility may be short-lived and will ultimately moderate and pave the way for economic growth towards the end of the year.
Related: Dave Ramsey Reveals Important Mortgage Rate Prediction for 2025
“Expect a volatile year in financial markets (both stocks and bonds) with the 10-year Treasury yield topping 5 percent at one point due to inflation concerns and unsustainable government deficits, falling below 4 percent. amidst a short-lived growth fear, but ending the year at 4.25% as the economy generates decent growth for the year,” he said.
The rise in the 10-year Treasury yield does not bode well for homebuyers as it closely influences mortgage rates.
However, a year-end drop in the 10-year Treasury yield aligns with forecasts that mortgage rates will fall modestly by the end of 2025.
Related: Veteran Fund Manager Issues Dire S&P 500 Warning for 2025
