Fed’s July 2025 Meeting: Impact on Mortgages

The Fed did not surprise on Wednesday with its decision to hold rates steady — the target range for the federal funds rate remains at 4.25% to 4.50%. The Fed highlighted elevated uncertainty in the economic outlook, along with a solid labor market and somewhat elevated inflation. There was no hint about future rate moves when the hold was announced. 

Despite growing political pressure and some rare dissent on the Board of Governors, Fed Chair Jerome Powell maintains a cautious, data-dependent approach. Key data the Fed will be watching include the still-uncertain impact of tariffs on inflation, the resiliency of the labor market, and the pace of GDP growth.

How the Fed's decision affects mortgages

Wednesday's rate decision was already priced into markets and is therefore likely to have a limited impact on mortgage rates in the near term. However, the Board voted 9-2 to hold rates steady, marking the first time since 1993 that two governors voted against the committee decision. There was no mention of forthcoming cuts.

In response to how the Fed's rate moves, or lack thereof, impact the housing market, Powell noted that the Fed does not set mortgage rates. “The best thing we can do for housing is to have 2% inflation and maximum employment. That’s what we can contribute to housing.” 

Impact on home buyers

Prospective home buyers may have been hoping for a rate cut on Wednesday, but that doesn’t mean it’s all bad news. 

A steady rate environment means you can lock in a mortgage rate now with more confidence. In fact, doing so may be smart. Worst case, a hold could turn to a rate increase if inflation comes in hotter than expected in the coming days or on September 11 when the Bureau of Economic Analysis (BEA) releases personal consumer expenditures (PCE) data for the prior months. 

Bottom line: Today's current average rate for 30-year fixed-rate mortgages is 6.75% APR. The average APR for 30-year fixed-rate refinance loans is 6.98%. Rates are likely to hold steady or increase slightly until more insight is gained into whether a September rate cut is on or off the table.

Impact on refinancing

Powell is in no hurry to cut interest rates, despite mounting political and internal pressure to do so. 

As a result, we could see mortgage refinance rates rise by year's end, especially if inflation remains sticky and the labor market does not meaningfully weaken. If you're in an ARM (adjustable rate mortgage) that has adjusted to a variable rate or if you're in a fixed rate over 7.25%, refinancing now could be your best move.

Economic factors that influence the Fed's decision

Cutting interest rates may seem like a no-brainer when you think of how much you or your business might save on borrowing costs. But it's not that simple.

Pros

Lower interest rates generally spur borrowing activity. A robust credit market not only makes it easier for you to refinance your mortgage, buy a new home, or borrow money in general, but it also makes it easier for businesses to do so. In turn, businesses have lower borrowing costs, which can free up funds to hire additional employees. In other words, lower interest rates can reduce unemployment and potentially increase salaries — all seemingly good things.

Cons

However, as a result of more people having more disposable income, the cost of goods can also increase, a.k.a. inflation. Remember when a six-figure salary used to mean something? The reason it's far less valuable now is due, in large part, to inflation. When inflation rises, it makes it harder to afford basic necessities, like food or a roof over your head — especially if the cost of necessities rises faster than your salary.

The current housing affordability crisis is one example of this. Record-low mortgage rates during the pandemic (low borrowing costs, see above), plus a work-from-home revolution and limited supply, contributed to one of the fastest-growing housing markets ever. Shelter inflation increased from under 2.5% to over 7.5% between March 2021 and March 2023. It's currently just under 5% and has declined much more slowly than the Fed's preferred gauge of inflation (core PCE inflation), which was at 2.7% in May.

Tariffs

Another factor influencing rate decisions is ongoing tariff uncertainty - including the upcoming August 1 deadline for reciprocal tariffs and the ongoing negotiations of trade agreements. While economists expect tariffs to increase consumer prices, the extent is not yet known. That uncertainty is cited as a primary reason for the Fed's wait-and-see approach.

Powell noted in post-meeting comments that “higher tariffs have begun to show through more clearly in the prices of some goods, but their overall effects on economic activity and inflation remain to be seen.”

What happens next with mortgage rates?

Analysts foresee a maximum of two Federal Reserve rate cuts before year-end, depending on inflation data and tariff impacts, but the rate cut outlook is dimming. Core PCE, reported Thursday, rose 2.8% year over year, higher than the 2.7% increase expected. 

According to the CME Group's FedWatch tool, there's a 38% probability of a September rate cut and a 62% probability of another rate hold — probabilities are based on 30-day Fed Funds Futures prices.

Friday's jobs report could shed more light on the Fed's next move.