Surprise Twist: Why a Rate Cut Caused Mortgage Rates to Climb

Hello everyone! Traditionally, the week before Christmas is calm in the market—but not this year! Last week was absolute pandemonium in the mortgage world, and I’m here to break down exactly how it all went down!

Read time: ~4 minutes

Rates ended HIGHER compared to last week, and volatility was HIGH. Rates are in the high 6% to low 7% range for most loan types without paying discount points. Paying discount points can get you in the mid 6% range.

Surprise Twist: Why a Rate Cut Caused Mortgage Rates to Climb

You might wonder if Trump is once again reconsidering firing Jerome Powell after last Wednesday’s drama. Going into the Fed meeting, everyone was nearly certain (97% odds) that we'd see a 0.25% rate cut—this year’s third. Sure enough, Powell delivered the cut, but his follow-up comments stirred a market frenzy.

Right after revealing the cut, Powell called it “a closer call,” which puzzled many who saw the cut as a foregone conclusion. Then the real bombshell dropped: the updated “Fed Dot Plot,” which shows how many rate cuts the Fed foresees in 2025. Last month, the projection was four cuts. Now, it’s only two. Worse still, the Fed upped its 2025 inflation projection from 2.1% to 2.5%, suggesting it won’t reach its 2% inflation goal next year after all.

Markets reacted swiftly. Stocks sank and mortgage rates climbed higher—yet again underscoring that the market responds to shifting expectations. With the Fed implying fewer cuts and higher inflation, mortgage rates are likely to remain elevated longer than previously thought.

Do Mortgage Rates Mirror the Fed Fund Rates??

One of the most common reason buyers give for delaying a home purchase is: “We heard the Fed is going to keep lowering rates, so we’ll wait until mortgage rates drop, too.” But if recent developments have taught us anything, it’s that mortgage rates and the Fed’s rate cuts don’t always move in sync.

It’s a widespread misconception that mortgage rates directly mirror the Fed’s actions. While there can be some long-term correlation, they often take different paths in the short term. Take a look at the chart below—it shows mortgage rates dropping nearly 2% in 2024 during a period when the Fed Funds Rate remained flat. Ironically, once the Fed actually cut rates in September, mortgage rates started moving higher.

This underscores that mortgage rates are driven by more than just the Fed’s decisions. Future expectations of the Fed’s moves can weigh more heavily on mortgage rates than an actual rate cut itself!

Mortgage Rate Predictions for 2025!

With the year winding down, everyone’s buzzing about where mortgage rates might land in 2025. Here’s a quick look at the latest forecasts from big industry names:

• Fannie Mae: Rates staying above 6.5%

• Housing Wire: 5.75% to 7.25%

• Mortgage Bankers Association: 6.4%–6.6%

• NAR (National Association of Realtors): Around 6%

• Realtor.com: 6.3%

• Redfin: High 6%

• Wells Fargo: 6.25%–6.65%

Although some were optimistic we could dip into the high 5% or low 6% range by late 2025, these predictions suggest a different reality. Most analysts now believe rates will stay above 6% well into 2025.

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