The Fed might make fewer cuts in 2025. What does that mean for mortgage rates?

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• The Fed expects fewer cuts to the federal funds rate and elevated inflation in 2025.
• Mortgage rates probably won't drop as much as anticipated next year. They may even inch up in the near term.
• Next year, rates may hover around the mid-6% range, only a slight decrease from their current levels.

The Federal Reserve announced at the close of its December meeting that it would lower the federal funds rate by another 25 basis points. This cut was unsurprising to investors and is unlikely to have much of an impact on mortgage rates. But another piece of information that came out of the Fed's latest meeting could impact how much mortgage rates go down next year — if they drop at all.

This meeting featured new economic projections, including the Fed's famed "dot plot," a chart showing where Fed policymakers think the federal funds rate will go in the future.

In the previous set of economic projections, policymakers were anticipating four rate cuts in 2025. But in their December projections, they now only foresee two cuts next year. They also expect inflation to take longer to reach their 2% target.

What fewer Fed cuts mean for mortgage rates

Though mortgage rates aren't directly impacted by changes to the federal funds rate, they are expected to ease in 2025 as the Fed continues lowering its benchmark rate. So what does it mean that the Fed may now make fewer cuts than expected?

In the near term, mortgage rates are likely to move a bit higher. And they may only drop slightly in 2025.

"Mortgage investors now are demanding higher yields because of the change in expectations for growth in inflation," says Emanuel Santa-Donato, senior vice president and head of the capital markets team at Tomo.

Inflation, the Fed, and uncertainty around the next administration

It's also possible the Fed won't even be able to get those two anticipated cuts in next year.

Rodney Ramcharan, an economist and professor of finance and business economics at the USC Marshall School of Business, thinks those cuts are unlikely to happen.

"The reason is that inflation remains above the target, the incoming administration is likely to pursue an inflationary program, which can add another maybe 20 to 30 basis points to inflation," Ramcharan says. "So it's difficult to see how and where those cuts are going to come from."

Many economists have flagged certain policy proposals from President-elect Donald Trump as potentially inflationary, particularly his proposed tariffs. If inflation starts rising in response to the new administration's policies, the Fed may opt to keep rates steady. Or, it could be forced to raise rates.

Fed officials have said that they believe inflation will continue to come down, though it may take longer than initially expected.

Ramcharan says it's difficult to know where inflation will go, and that it's possible the Fed will need to raise rates next year to combat inflation.

"The problem with uncertainty and the volatility of the incoming administration is that it then causes economic policy to whip back and forth," he says.

What does this mean for homebuyers?

Unfortunately for homebuyers, mortgage rates probably won't drop enough to substantially improve affordability in 2025.

"The market is not forecasting any material decline in mortgage rates," says Santa-Donato. "So from a homebuyer's perspective, there really isn't any reason to wait for interest rates to decline any more."

Santa-Donato notes that many forecasters predict mortgage rates will hover around the mid-6% range next year. For reference, 30-year mortgage rates were at 6.60% last week, according to Freddie Mac.

If you're thinking about buying a home, it's generally better to consider how homeownership fits into your lifestyle and finances, rather than trying to time the market to snag the best rate. And as we head into 2025, it's looking like waiting for better mortgage rates will become even more futile.

If homeownership is on the horizon for you, you can still improve affordability on an individual level by shopping around and getting quotes from more than one mortgage lender. The best mortgage lenders offer low rates, minimal fees, and other beneficial features that can make the process even more affordable. Many lenders now offer things like down payment assistance or credits for closing costs, lowering your out-of-pocket costs.