Fed Holds Rates in January

January’s Fed decision

While widely anticipated, the Federal Reserve stopped its recent course and held the federal funds target range steady at its January meeting.

The central bank began its ongoing fight against inflation in March 2022. With the annualized pace of inflation inching up over the last quarter of 2024 to 2.9% and labor markets displaying strength, the voting committee decided to pause the rate cuts

“The nation’s economy continues to be resilient against long-term economic setbacks, which means that the Fed is in no imminent need to continue its rate cuts,” said Selma Hepp, chief economist at CoreLogic. “And with the economic activity expected to remain robust and continue to post a 2%+ growth rate, the case for further monetary loosening in the coming months is increasingly less compelling.”

The Fed’s role and January’s FOMC meeting

The Fed technically doesn’t set mortgage interest rates. Multiple factors dictate mortgage rate movements, but they do intrinsically correlate with the central bank’s policy actions.

At its January meeting, the Federal Open Market Committee (FOMC) held the federal funds target range, following a 50-point cut in September and 25-point cuts in November and December. Prior to that, the Fed held the target range steady eight consecutive times.

The U.S. annualized inflation rate hit a 41-year high of 9.1% in June 2022 but mostly followed a downward trajectory since. Over the course of 2024, the pace of inflation took a step back for every two steps forward. Inflation began the year at 3.1% and ended it at 2.9%, according to the U.S. Bureau of Labor Statistics. That remains above the FOMC’s goal of 2%.

In its post-meeting statement, the Committee said it "judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”

As always, the FOMC gave the caveat that it would “carefully assess incoming data, the evolving outlook, and the balance of risks” and will be prepared to adjust the stance of monetary policy as appropriate.

In addition to holding the fed funds rate, the FOMC will continue reducing its holdings of Treasury securities, mortgage-backed securities and agency debt. The next FOMC meeting will take place on March 18-19, 2025.

According to the FOMC projection materials from December, the median forecast accounts for two 25-basis point cuts in 2025.

How will mortgage rates react?

After climbing to a 23-year high in 2023, mortgage interest rates followed a hill-and-valley pattern in 2024. Mortgage rate movement varied in the immediate aftermath of a Fed decision.

The day following each of the two previous rate pauses in June and July, the average 30-year fixed-rate mortgage (FRM) posted a week-over-week decrease of four (0.04%) and five (0.05%) basis points, respectively, according to Freddie Mac. After September’s 50-point cut, November’s 25-point cut and December’s 25-point cut, the 30-year FRM fell 11 basis points (0.11%), one basis point (0.01%) and grew 12 basis points (0.12%), respectively, from the week prior.

Interest rates typically rise alongside increases to the fed funds rate and decline after cuts. In its statement, the FOMC also said economic activity keeps expanding “at a solid pace,” while job gains slowed and the unemployment rate inched up but remains low.

Inflation has progressed toward the FOMC’s 2% goal, but needed to be seen as sustainable for a cut to be called for. A Fed cut followed by decreasing mortgage rates would surely be a welcome sign for house hunters, many of who have been sidelined due to being priced out of the marketplace.

Now in 2025 with government chaos and major uncertainties surrounding economic policy, interest rates may become even more volatile than normal.

Should you lock in a mortgage rate?

Because multiple economic and geopolitical factors influence mortgage rates, they’re subject to a lot of volatility.

Although projections can shift, the FOMC’s latest action signaled the economic forecast needs more organic cooling before another rate cut can be appropriate. As long as the pace of inflation keeps slowing sustainably, additional cuts could be on the horizon. Regardless of where rates go, you should always negotiate and get creative in budgeting. Building home equity is one of the biggest advantages of owning property and most common ways to accumulate wealth.

If you’re ready to begin your path to homeownership, talk to a local mortgage professional to see what rates and loan types you qualify for.