The Fed is weighing inflation, recession indicators and uncertain trade policies

Weekly Mortgage Predictions: Rates Above 6.7% as Fed Weighs Economic Uncertainty Here's how that impacts mortgage rates

The Fed is weighing inflation, recession indicators and uncertain trade policies

The Federal Reserve is expected to hold interest rates steady at its monetary policy meeting this Wednesday — though sticky inflation, increased unemployment and slowing economic growth could force the central bank to cut rates in late spring or early summer. Reductions to the benchmark federal funds rate will indirectly lower other types of financing and consumer borrowing rates, like mortgages, over the long term.

Investors are holding out for the Fed's interest rate forecast tomorrow, while concerns over a potential recession and uncertain trade policies keep pressure on financial markets. Mortgage rates, linked to the bond market, have been wavering since late January due to President Trump's on-and-off-again tariffs, stock market swings and geopolitical uncertainty. Still, over the last week, they've remained relatively stable, hovering around 6.7% on average for a 30-year fixed home loan, according to Bankrate data.

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Fannie Mae projects mortgage rates to stay above 6.5% for the better part of the year. Yet lenders base their rates on a range of factors, and no forecast is set in stone. Given the precarious nature of the economy, any sign of risk or disruption could shift 10-year Treasury yields, which would directly impact the trajectory of mortgage rates.

For example, if an economic downturn appears likely, mortgage rates could start decreasing, but they would need to drop closer to 5.5% to bring buyers into the market at scale, according to Alex Thomas, senior research analyst at John Burns Research and Consulting.

While cheaper home loan rates are positive for housing affordability, a shaky economy could keep the housing market frozen. "If lower mortgage rates are the result of a recession, housing demand could remain muted," said Thomas.

Read more: How the Federal Reserve's Decision Will Impact Mortgage Rates

What's happening with mortgage rates this week

The key question is how the Trump administration's economic austerity measures and trade policies will influence the Fed's future interest rate adjustments. At the Federal Open Market Committee meeting March 18-19, central bankers will release an updated Summary of Economic Projections, outlining policymakers' outlook for interest rates in 2025.

The Fed is tasked with maintaining maximum employment and containing inflation. A sluggish economy typically warrants interest rate cuts to stimulate growth, but lowering rates too quickly could fuel price growth when inflation is still sticky.

While the most recent data doesn't show a surge in unemployment or a spike in inflation, it hasn't had enough time to simmer in real time. For example, the wave of federal layoffs and job cuts isn't appearing as a sustained trend in official labor data yet. "It's going to take more than one month of negative employment data for the Fed to change its policy stance," said Julia Pollak, chief economist at ZipRecruiter.

That's because the figures and statistics that economists and the Fed rely on are backward-looking, while investors make moves based on anticipation and speculation. "It may take some time before we see the data catch up with sentiment, but it seems clear that businesses and consumers are having a hard time calibrating their future plans at the moment," said Thomas.

Until the economic impact of the administration's policies is clearer, mortgage rates will continue to fluctuate. Tariffs are widely considered to be inflationary, but they could prove transitory and translate only into a one-time price increase for goods and services.

A not-so-rosy outlook for the housing market this year

Aside from the normal day-to-day volatility, mortgage rates will likely stay above 6% for a while. That may seem high compared to 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. Since the 1970s, the average rate for a 30-year fixed mortgage has been around 7%.

Prospective homebuyers who have been waiting for mortgage rates to drop for the past few years may need to adjust to the "new normal" in the mortgage market, with rates fluctuating between 5% and 7% over the longer term.

Today's unaffordable housing market isn't just a result of high mortgage rates. A long-standing housing shortage, expensive home prices and a loss of purchasing power due to inflation have locked out buyers over the last several years.

Tips for today's homebuyers

With the spring homebuying season fast approaching, prospective homebuyers are left wondering whether to enter the market or continue waiting on the sidelines. It's never a good idea to rush into buying a home without establishing a clear budget.

Here's what experts recommend before purchasing a home:

💰 Build your credit score. Your credit score will help determine whether you qualify for a mortgage and at what interest rate. A credit score of 740 or higher will help you qualify for a lower rate.

💰 Save for a bigger down payment. A larger down payment allows you to take out a smaller mortgage and get a lower interest rate from your lender. If you can afford it, a down payment of at least 20% will also eliminate private mortgage insurance.

💰 Shop for mortgage lenders. Comparing loan offers from multiple mortgage lenders can help you negotiate a better rate. Experts recommend getting at least two to three loan estimates from different lenders.

💰 Consider mortgage points. You can get a lower mortgage rate by buying mortgage points, with each point costing 1% of the total loan amount. One mortgage point equals a 0.25% decrease in your mortgage rate.