Fed holds rates steady amid inflation concerns, resilient job market

The Federal Reserve held benchmark rates steady in the range of 4.25% to 4.5% following its two-day meeting on Wednesday, a decision with implications for the mortgage industry. 

The move, expected by virtually all monetary policy watchers, underscores the challenge facing the Federal Reserve — deciding when it’s appropriate to cut rates. It’s a delicate balancing act as cutting too late could keep mortgage rates elevated longer than necessary, hurting the housing industry, but cutting too soon risks reigniting inflation and forcing future rate hikes.

While the labor market remains stable and there are signs of easing price pressures, year-over-year inflation is above the 2% target. The economic impact of recent trade policies also remains uncertain. Although President Donald Trump has repeatedly pressured Fed Chair Jerome Powell to cut rates, Powell has reiterated that risks to both employment and inflation are rising. 

“The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated,” the Federal Open Market Committee (FOMC) said in a statement. “Uncertainty about the economic outlook has diminished but remains elevated. The Committee is attentive to the risks to both sides of its dual mandate.”

Following the announcement on Wednesday, Powell told journalists that “changes to trade, immigration, fiscal and regulatory policies continue to evolve, and their effects on the economy remain uncertain.”

Specifically on tariffs, Powell said: “The effects on inflation could be short-lived, reflecting a one-time shift in the price level. It’s also possible that the inflationary effects could instead be more persistent.”

He also added that, “One of our jobs is to make sure that a one-time increase in inflation doesn’t turn into an inflation problem.”

According to Powell, housing and non-housing services have been gradually moving toward levels consistent with 2% inflation, while goods inflation is rising.

“We do expect to see more of that over the course of the summer. It takes some time for tariffs to work their way through the distribution chain to the end consumer,” Powell said.

Housing impacts

The U.S. Bureau of Labor Statistics (BLS) reported that non-farm payrolls added 139,000 new jobs in May, down from April’s revised number of 147,000. Meanwhile, inflation data for May showed year-over-year price increases of 2.4%, up from 2.3% in April. Inflation rose 0.1% from April to May, compared to 0.2% from March to April.

“At 2.8% for May, core CPI inflation has stopped declining, leaving many to speculate whether the Fed should lower rates or keep them the same,” said Geno Paluso, CEO of Sagent. “Lower rates would lead to loan payoffs and possible borrower hardships for mortgage servicers to manage, and continued higher rates could help servicer retention for the balance of 2025.”  

Meanwhile, mortgage lenders are shifting resources and expanding borrower education effort in anticipation of refinancing opportunities, according to Nash Paradise, director of sales at UMortgage. “We’re seeing call centers and larger retail lenders starting to bolster operations staffing to prepare for a push into refinancing as we near three years of higher interest rates this fall,” Paradise said. 

HousingWire’s Mortgage Rates Center reported Tuesday that the average 30-year conforming loan rate was holding steady near 7%. It has remained above 6.8% since early April, when Trump announced his global tariff policies.

According to Powell, the housing market has both a long-term and short-term problem.

“We have a longer-run shortage of housing, and we also have high rates right now. The best thing we can do for the housing market is to restore price stability in a sustainable way and create a strong labor market,” he said.

Looking ahead

The FOMC, which began its rate pause in January, had implemented a series of rate cuts in late 2024 — specifically, a 50 basis-point cut in September and two 25-bps cuts in November and December. 

According to projections released Wednesday, Fed policymakers still anticipate lowering the policy rate to 3.9% by year’s end — implying cuts totaling 50 bps. That’s unchanged from the March forecast. But the outlook for 2026 has shifted, with the consensus now expecting only one rate cut next year, down from two that were previously projected.

On the economic front, officials now expect inflation to reach 3% in 2025, up from 2.7% in the March forecast. The unemployment rate is projected to rise slightly to 4.5%, compared to 4.4% previously.

Powell said that because the economy remains solid, the Fed can keep monetary policy at a restrictive level — not a neutral one, despite the uncertainty — for a while. A rate hike due to higher inflation expectations this year, he said, is not the “base scenario,” before adding that “we’ll make smarter and better decisions if we just wait a couple of months.”

“The committee has little urgency to cut rates,” Odeta Kushi, deputy chief economist at First American, said in a statement. “However, while economic data looks solid for now, the outlook for the rest of the year is more uncertain, in part due to  tariff impacts.” 

HousingWire Lead Analyst Logan Mohtashami recently wrote that “the Fed needs to see a significant decline in the labor market before they will adopt a more dovish stance and cut rates,” but “the labor market isn’t deteriorating enough for them to become more dovish yet.”

“Remember, the only reason they cut rates by 1% last year was because the labor data was getting much softer on them and they didn’t want their policy to be too restrictive. Now, it’s a waiting game for rate cuts. The question is: will they be too late on cutting rates again?” Mohtashami wrote.

According to the CME Group‘s FedWatch tool, only 14.5% of market participants expect a rate cut at the Fed’s July meeting, while 85.5% think that rates will stay unchanged. 

“The Fed has made it clear they’re data dependent, but bond traders have been aggressively trading on economic data, political maneuvering, tariffs and tweets,” said Paradise of UMortgage. “We should expect slow and steady Fed reactions through the end of the year, but be prepared for more interest rate instability as outside factors play a larger role than Fed projections.”