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- Can the inflation drop improve mortgage interest rates? (cbsnews.com)
Mortgage Rates See Glimmer of Hope as Inflation Dips and Unemployment Rises
Homebuyers and existing homeowners considering refinancing may have grown accustomed to the elevated mortgage rates of recent years, potentially leading them to overlook current opportunities. However, a shift in economic indicators could signal a more favorable lending landscape as we approach the new year. Mortgage interest rates have, on average, decreased by approximately a full percentage point since January, with growing optimism for further declines, possibly before the year concludes.
The Federal Reserve has implemented three interest rate cuts in the final four months of the year, bringing the federal funds rate down by 75 basis points since September 1. This activity has contributed to mortgage interest rates hovering near their lowest levels since 2022. Further encouraging news emerged on Thursday.
Following the conclusion of the government shutdown, the first inflation report revealed that inflation stood at 2.7% in November, a decrease from the previous 3% and closer to the Federal Reserve’s long-term target of 2%. This development holds significant potential for improving mortgage interest rates.
The Impact of Declining Inflation on Mortgage Rates
In essence, a drop in inflation can indirectly improve the mortgage interest rate environment. A sustained decline in inflation can incentivize the Federal Reserve to continue its interest rate cutting campaign, which, in turn, can drive mortgage interest rates lower.
While mortgage rates are influenced by various factors, including the 10-year Treasury yield, the Federal Reserve’s rate activity significantly impacts market sentiment. Lenders often adjust their offerings preemptively in anticipation of formal cuts or hikes.
Therefore, a lower inflation rate is likely to encourage the central bank to maintain its trajectory of interest rate reductions. This alignment was a primary driver behind the Fed’s rate cuts in 2024, followed by a pause in early 2025 as inflation showed a temporary uptick.
Beyond inflation, another factor that may prompt further Fed rate cuts, potentially as early as the next meeting in January, is the recent unemployment report. The unemployment rate has risen to 4.6%, marking its highest point since September 2021. The Federal Reserve possesses the tools to stimulate the economy through lower interest rates, and a combination of declining inflation and rising unemployment could provide the justification for such action.
Thus, two key factors-a lower inflation rate and a higher unemployment rate-could trigger additional Fed rate cuts, subsequently leading to a decline in mortgage interest rates.
However, these economic data points are complex and interconnected, and the path to a consistent decline in mortgage interest rates remains intricate. For example, the CME Group’s FedWatch tool currently indicates only a 26% likelihood of a January Fed rate cut. It is also possible that the Federal Reserve may interpret this week’s new data as a basis for maintaining current interest rates rather than lowering them further, which could stall any improvements in the mortgage rate climate.
Despite these complexities, the mere possibility of additional Fed rate cuts and a further decline in mortgage interest rates represents a positive development for borrowers. As recently as August 2023, mortgage interest rates reached their highest levels since 2000. Therefore, any downward movement is encouraging, though borrowers may need to exercise continued patience to achieve their preferred mortgage rates.
The Bottom Line
A confluence of events has contributed to the decline in mortgage rates in 2025, and various factors are poised to influence their trajectory in the coming weeks and months. For borrowers, the current interplay of these elements-inflation, unemployment, and Fed rate policy-appears to be working in their favor, potentially leading to even lower mortgage rates in the near future.
It is crucial to acknowledge that predicting the future of interest rates with absolute precision is impossible. Therefore, if current rates align with your budget, whether for a new home purchase or a refinance, considering locking in a rate now could be a prudent decision. Should even lower rates materialize in the future, you retain the option to refinance, while simultaneously realizing interest cost savings in the interim.
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