3 reasons mortgage rates probably won't drop after the Fed meeting, even if they cut rates

The offers and details on this page may have updated or changed since the time of publication. See our article on Business Insider for current information.

Affiliate links for the products on this page are from partners that compensate us and terms apply to offers listed (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate products and services to help you make smart decisions with your money.

• The Fed is expected to lower the federal funds rate by 25 basis points this week. But mortgage rates are unlikely to fall in response.
• Strong economic data and fears over inflation reigniting have pushed mortgage rates up recently.
• As long as the Fed continues lowering rates next year, mortgage rates should go down in 2025.

The Federal Reserve is expected to announce it will lower the federal funds rate by 25 basis points on Thursday, following a 50-basis-point cut at its meeting in September. 

A lot of people expect mortgage rates to fall when the Fed cuts its benchmark rate. But that's not really how the relationship between mortgages and the Fed works. And right now, there are other forces keeping mortgage rates high, even as the Fed gears up to lower rates again. 

A Fed cut probably won't have much of an impact on mortgage rates

Mortgage rates often move up or down ahead of expected Fed moves. But once the market expectations are set, they typically don't change unless the Fed surprises everyone. 

"The market is basically fully pricing in a 25-basis-point cut," says Emanuel Santa-Donato, senior vice president and chief market analyst at Tomo. "Markets only react when they get things different than they expect."

Investors will also be closely watching Fed Chair Jerome Powell's press conference following the meeting for clues as to what the central bank might do at future meetings. Any change from the current outlook, which is that the Fed will continue to slowly lower rates through the rest of this year and in 2025, could cause mortgage rates to fluctuate.

"Any additional guidance provided might move mortgage rates, but the cut itself is not really going to do anything one way or another," Santa-Donato says.

Why mortgage rates are so high right now: The economy, the Fed, and the election

Santa-Donato says that one of the main forces impacting mortgage rates right now isn't the upcoming Fed meeting, but rather market expectations of high inflation now that Former President Donald Trump has won the presidency. 

"The market over the past month has increasingly been pricing in a Donald Trump victory and Republican sweep, and the market believes, based on the policies that party has outlined, that is going to be the most inflationary outcome," he says.

Additionally, the economy has been surprisingly resilient this year, which has shifted investor expectations around future Fed cuts. Selma Hepp, the chief economist at CoreLogic, says that markets initially overestimated how much the Fed would cut rates after its 50-basis-point cut in September.

"We had that initial 50-basis-point and I think markets may have expected at that point that you'd have more," Hepp says. "But then when the job report and the inflation report came in, there was sort of that step back realizing that things are still not falling off the cliff and we still have a really strong economy."

We could see mortgage rates ease next year as the Fed continues cutting rates

The Fed is expected to continue lowering rates next year, which should help mortgage rates go down in 2025. But how much they'll fall depends on the economy, whether the labor market continues to cool off, and how inflation trends.

"I do think mortgage rates will come down, maybe not as much as we were hoping," Hepp says. "I think maybe 6% is the sort of benchmark around which mortgage rates will oscillate, whereas we were hoping to get maybe to 5.5% to 5.75% by the end of next year."

If inflation reignites, that could keep rates near their current levels or even cause them to rise further.

"If the federal government promotes inflationary policies, the reaction of the Fed could be to raise rates and try to get that inflation under control," Santa-Donato says. "That would push mortgage rates higher."

What this means for homebuyers and homeowners

Even though mortgage rates are high and likely to remain elevated at least through the end of this year, it could still be worth buying a home now if you're ready. 

Hepp points out that buyers can often get better deals on homes in the winter. So even though you might not get a low mortgage rate, you could find a lower-priced home to offset a higher rate. 

"Winter season does tend to be slower with less competition and maybe sellers are more willing to give discounts," Hepp says. "Because if they have not taken their home off the market, they're more likely to entertain a discount because at that point it means that they really need to sell."

And if rates do drop next year, more homeowners will have an opportunity to refinance and lower their mortgage payments.