The Federal Reserve announced an interest rate cut in September 2024, marking the end of consistent rate hikes since 2020.Â
The announcement rallied financial markets and lowered the cost of borrowing for consumers, giving hope that mortgage rates may follow suit.
The board announced its approach to cutting interest rates over the next few years, and most experts predicted that frequent rate cuts would be on the horizon.
However, 2025 may look slightly different than initially anticipated due to a few compounding factors.
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Markets have begun to adjust for the likelihood of fewer interest rate cuts this year as the incoming Trump administration transitions into power and its policy agenda takes effect.
Fed Chairman Jerome Powell has already indicated that he will not step down despite reported tensions between him and President-elect Trump. He has also suggested that the Fed wouldn’t directly factor the effects of Trump’s policies into its fiscal policy until after he takes office.
However, analysts note that inflation may be more of a concern this year and will strongly influence interest rate levels.
Federal Reserve Chair Jerome Powell is seen.
Getty
Inflation will persist, remaining the Fed’s top priority
In 2024, there were three consecutive rate cuts within four months, a stark contrast from the four years of steady increases. Though the federal funds rate was 0.2% in 2022, it quickly climbed to 5.33% by August 2023.
Though the Fed had initially anticipated frequent rate cuts through 2025 and even 2026, it readjusted its projections in December. Powell noted that caution will be used going forward, and some expect a pause in rate cuts effective after the upcoming January board meeting.
However, Fed fiscal policy is driven by a balance of stable consumer prices, maintaining economic performance, and promoting high employment levels. Inflation and labor market performance are the most influential factors shaping interest rate levels.
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Greg McBride, Chief Financial Analyst at Bankrate, shared predictions about what to expect from the Fed this year.
“Stubborn inflation and economic growth that has surprised to the upside in 2024 will give way to – stubborn inflation and slower, still solid economic growth in 2025,” he wrote in a statement. “I am forecasting three interest rate cuts for the year, bringing the Fed funds rate to 3.50% – 3.75% by year-end.”
Though the Fed may proceed cautiously at the beginning of the year, more interest rate cuts are very possible, especially if inflation comes down.
Continued market volatility is on the horizon
While the stock market is often changing, bonds are considered safer and more predictable investments. Investors often turn to bonds, 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 equities and fixed income — a historically safe and stable product — will become less predictable this year. However, this volatility may be short-lived, and ultimately, it will moderate and pave the way for economic growth by the end of the year.
Related: Dave Ramsey reveals major 2025 mortgage rate prediction
“Expect a volatile year in financial markets — both stocks and bonds — with the 10-year Treasury yield going above 5 percent at one point on worries of inflation and unsustainable government deficits, falling under 4 percent amid a short-lived growth scare, but ending the year at 4.25% as the economy delivers decent growth for the year,” he said.
The rise in the 10-year treasury yield doesn’t bode well for homebuyers, as it closely shapes mortgage rates.
However, an end-of-year drop in the 10-year treasury yield aligns with forecasts of mortgage rates falling modestly by the end of 2025.
Related: Veteran fund manager issues dire S&P 500 warning for 2025
