The problem is that while inflation has dropped far below its peak of 9.1 percent in mid-2022, it remains stubbornly above the Fed's 2 percent target. As a result, the Fed, led by Chair Jerome Powell, is expected Wednesday to signal a shift to a more gradual approach to rate cuts in 2025.
Key takeaways. The Federal Reserve is projected to cut interest rates three more times in 2025, bringing the key borrowing benchmark to 3.5-3.75 percent, according to Bankrate's 2025 Interest Rate Forecast from Chief Financial Analyst Greg McBride, CFA.
For only the third time in 2024, the Federal Reserve has lowered the federal funds rate. On Dec. 18, the Fed cut the rate, which influences interest on everything from car loans to credit cards, by 25 basis points. That takes it from 4.50% to 4.75% to 4.25% to 4.50%, the lowest it's been since February 2023.
The short answer is: It's highly unlikely we'll see mortgage rates drop back to 3% anytime soon. However, recent inflation numbers point to cooling of the pace of inflation.
Why mortgage rates won't drop to 2% again. Again, when mortgage rates hit record lows early in the pandemic, the federal funds rate was near zero. Barring another major economic shock, the Fed projects that the federal funds rate will only take modest adjustments downward over the next several years.
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The National Association of Home Builders expects the 30-year mortgage rate to decrease to around 6.5% by the end of 2024 and fall below 6% by the end of 2025, according to the group's latest outlook.
The Fed cut interest rates by a quarter-point in December. According to the agency's forward guidance “dot plot,” the committee's members penciled in just two quarter-point cuts for 2025, down a full percentage point from their September chart. Fed officials see the fed funds rate falling to 3.9% in 2025.
New Projections
This marks a slower pace compared to the four quarter-point cuts previously projected in September. By 2026, the federal funds rate is expected to fall further to 2.9%.
Interest Rate in the United States is expected to be 4.50 percent by the end of this quarter, according to Trading Economics global macro models and analysts expectations. In the long-term, the United States Fed Funds Interest Rate is projected to trend around 3.50 percent in 2026, according to our econometric models.
Locking in early can help you get what you were budgeting for from the start. As long as you close before your rate lock expires, any increase in rates won't affect you. The ideal time to lock your mortgage rate is when interest rates are at their lowest, but this is hard to predict — even for the experts.
Likewise, we expect the 10-year Treasury yield to move down to an average of 3.0% in 2027 from its current yield of 3.7%. We expect the 30-year mortgage rate to fall to 4.75% in 2027 from an average of 6.75% in 2024. Inflation forecast.
At its February 2024 meeting, the Reserve Bank Board decided to leave the cash rate target unchanged at 4.35 per cent. This decision supports progress of inflation to the midpoint of the 2–3 per cent target range within a reasonable timeframe and continued moderate growth in employment.
There's just one step to solve this. If the Federal Reserve wants to lower the interest rate, it will increase the money supply.
Today's rates seem high compared with the recent 2% rates of the pandemic era. But experts say getting below 3% on a 30-year fixed mortgage is unlikely without a severe economic downturn.
Though mortgage rates have fallen from their 8% peaks, the decline has been slow and gradual. Over the past 12 months, the average 30-year fixed mortgage rate has fluctuated between 6.5% and 7.5%. Most housing economists had expected mortgage rates to drop to 6% by the end of 2024, moving into the mid-5% range in 2025.
On Dec. 18, the Federal Reserve made its third consecutive cut of 2024, reducing the federal funds rate by 0.25 percentage points.
The move, the Fed's third rate cut of the year, reduces the central bank's target rate to between 4.25% and 4.5%. In its statement announcing the cut, the Fed now projects just two interest rate cuts for 2025.
"As we look ahead into 2025, lower CD interest rates are a possibility," says Ben Alvarado, executive vice president at California Bank and Trust. After all, the Federal Reserve lowered its benchmark rate three times in 2024, and many analysts expect there to be at least two more Fed rate cuts in 2025.
Falling interest rates expected to drive recovery in the second half of 2025, says CIBC's chief economist.
Fannie Mae expects rates to average 6.4% for the year. Wells Fargo projects a slight decline, with rates averaging around 6.3% by the end of the year. Goldman Sachs predicts rates will remain above 6% through 2025.
Which bank gives the highest interest rate on FD? As of 2024, Canara Bank offers the highest interest rate of 7.25% for 444 days.
If economic conditions remain stable, mortgage rates may not fall as much. But if the labor market weakens and the Fed has to cut rates more aggressively, we could see rates drop substantially. Rates are unlikely to drop back down to the historic lows of 2020 and 2021, when 30-year fixed rates fell below 3%.
The bottom line. Predicting exactly when mortgage rates will hit 5% is difficult. It could happen by late 2025, but market conditions could speed up or delay this timeline. "Some consumers feel rates will drop in the next two to four months [but] that may never happen," says Rathbun.