Mortgage Predictions: The Fed Isn’t Rushing to Lower Interest Rates This Week

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The Federal Reserve and prospective homebuyers are both locked in a waiting game. The Fed is waiting for inflation to cool enough to start lowering interest rates, and homebuyers are waiting for mortgage rates to come down and affordability to improve. 

The Fed’s governing body, the Federal Open Market Committee, will meet June 11-12 this week. But experts say the FOMC isn’t likely to lower interest rates yet. 

Homebuyers shouldn’t expect any immediate drastic dips in rates. If inflation continues to decelerate and the Fed is able to make even one rate cut, we may see some modest improvements in mortgage rates by the end of the year, according to Odeta Kushi, deputy chief economist at First American Financial Corporation. 

That’s a big “if.”

At this week’s meeting, we’ll receive an updated Summary of Economic Projections, which could offer clues as to the direction of mortgage rates over the next several months. 

“In the SEP, we’ll learn if Fed members still expect to be cutting rates this year or not, and get a sense of where they believe economic growth, unemployment and inflation will be headed for the remainder of 2024 and beyond,” said Keith Gumbinger, vice president of mortgage site

High mortgage rates have made buying a house prohibitively expensive. I spoke with several housing market experts about their expectations for Fed rate cuts and when we might see lower mortgage rates in 2024.

What do inflation and labor market data have to do with interest rates? 

The FOMC will be closely monitoring the Consumer Price Index for May, released Wednesday before its meeting concludes. The central bank wants to see inflation move closer to its target annual rate of 2%. The Personal Consumer Expenditures Price Index (the Fed’s preferred measure of inflation) showed prices growing at an annual rate of 2.7% in April. 

The other big metric the Fed cares about is employment. Last week’s labor report showed the unemployment rate reaching 4% for the first time since January 2022, with the US adding 272,000 jobs in May, well above investors’ expectations. Another large increase in jobs indicates a still-growing economy, giving the Fed a reason to wait longer before cutting rates.

Does the Fed directly set mortgage rates? 

The Fed doesn’t directly set mortgage rates. However, its policy changes, as well as investors’ expectations for future policy changes, influence whether rates on home loans move up or down.

Economic data, like last week’s labor report and this week’s CPI numbers, may change expectations about the future of rate cuts this year, causing mortgage rates to dip down even before the rate cuts actually happen.

“If the labor data gets weaker, it doesn’t matter what the Fed does; mortgage rates will go lower,” said Logan Mohtashami, lead analyst at HousingWire.

Why is the Fed holding off on rate cuts? 

Since progress on inflation has been slow and the labor market remains strong, the Fed has reason to hold off on lowering rates for another month, if not more. 

It’s a delicate balancing act. The Fed wants to see unemployment levels increase just enough to bring inflation down, but not so much that we fall into a recession. The Fed also wants to avoid cutting interest rates too soon, only to have inflation rear its head again. By holding interest rates steady, the Fed can continue to assess the overall economy.

“The Fed won’t cut rates until they have good reason to do so,” said Alex Thomas, senior research analyst at John Burns Research and Consulting.

When will the Fed start lowering interest rates?

The central bank may make its first cut in July, but that will only happen “if the labor market report is weak and inflation comes down significantly,” said Lisa Sturtevant, chief economist at Bright MLS.

A more likely scenario is for the Fed to cut rates in the fall or early winter. 

“If the cuts happen, they will happen toward the end of the year,” said Mohtashami. He believes we’ll see only one or two cuts, as opposed to the three cuts previously penciled into the Fed’s outlook. 

Another factor to consider is the general election in November. 

“Typically, the Fed refrains from making monetary policy decisions too close to a presidential election, to avoid the prescription of influencing the outcome,” said Sturtevant. “If the Fed does not cut rates in July, it is possible there will not be any rate cuts until 2025.”

Where are mortgage rates going this year? 

In December of last year, after the Fed indicated it was prepared to lower interest rates in 2024, mortgage rates moved down into the mid-6% range. Some early-year forecasts optimistically called for rates to fall below 6% by the end of 2024. 

But then mortgage rates started to climb back up. Since mid-February, the average rate for a 30-year fixed mortgage has held above 7%.

Experts still anticipate that mortgage rates will moderate in the coming months, landing between 6% and 6.5% by the end of the year. But if new economic data shows higher inflation, investors may adjust their forecast for rate cuts, causing Treasury yields and mortgage rates to surge, said Orphe Divounguy, senior macroeconomist at Zillow Home Loans. His baseline forecast calls for rates to fluctuate between 6% and 7% throughout the rest of 2024. 

It’s also important to note that the Fed won’t cut rates all at once. Instead, it will be a gradual process over the next few years, meaning it may take a while before we see mortgage rates drop below 6%. 

The bottom line? “Rates are going to remain higher than we had been predicting last year,” said Sturtevant.

When will affordability improve for homebuyers?

Today’s unaffordable housing market isn’t due to just high mortgage rates. Homebuyers are also being pinched by elevated home prices, limited housing supply and the pain of high inflation. Unfortunately, there’s no quick fix to all of these problems. But baby steps are better than no steps at all.

“Frustrating for some as it may be, it’s better that conditions continue to align slowly,” said Gumbinger. 

For example, a rapid decline in mortgage rates would only spur more homebuying demand. Without the supply to support that demand, lofty home prices could press even higher, according to Gumbinger.

As mortgage rates gradually fall in the coming years, we should see more homeowners come off the sidelines and sell their houses. But most sellers are also buyers, so that won’t repair today’s housing shortage entirely. 

Divounguy said the key to long-term affordability lies in boosting residential construction via land-use and zoning reforms. We’ve already witnessed how new construction is proving to be a bright spot in today’s difficult housing market: To lower the barrier-to-entry for homebuyers, many builders are offering sales incentives like discounted prices, closing-cost assistance and mortgage-rate buydowns.

If you don’t live in an area where there’s a lot of new construction (or you’d prefer to purchase an existing home), there are things you can do to make buying a house more accessible:

  • Build your credit score: Mortgage lenders reward borrowers with excellent credit scores with lower mortgage rates, which can affect your monthly payments. Paying your credit card bill on time and in full, and lowering your credit utilization ratio can help improve your score over time. 
  • Save for a bigger down payment: With a larger down payment, you can take out a smaller mortgage, which will save you interest over the life of your loan. Depending on your timeline for buying a home, consider stowing your money in a high-yield savings account or certificate of deposit to take advantage of higher returns. 
  • Explore first-time homebuyer programs: First-time homebuyer programs can offer assistance with your down payment, closing costs and more. Also consider government-backed loans, such as FHA loans, USDA loans and VA loans, which often have lower credit score and down payment requirements than most conventional loans.