Mortgage Rate Forecast for May: Can Rates Fall Without Fed Cuts?

CNET

07-05-2025

Mortgage rates can change daily and even hourly.
Tharon Green/CNET
The Federal Reserve may be stand its ground on interest rates, but the outlook for mortgage rates is still on shaky footing.
Since early spring, average 30-year fixed rates have been moving between 6.5% and 7%, with no clear direction forward.
Despite concerns over a potential recession and pressure from the White House to reduce interest rates, the central bank voted to leave its benchmark federal funds rate unchanged on May 7 to better evaluate the impact of the administration's trade and austerity measures.
Though the Fed's policy changes have a ripple effect on all short-term lending rates, the central bank doesn't directly set the rates on home loans. Mortgage rates are primarily driven by movement in the bond market, specifically on the 10-year Treasury yield.
Bond yields and mortgage interest rates rise and fall depending on how new economic data and policy changes shift market speculation and risk assessment, said Odeta Kushi, deputy chief economist at First American Financial Corporation.
Given contentious debates over tariffs and President Trump's political posturing against Fed Chairman Jerome Powell, investors are still divided over the central bank's projected path of rate cuts in 2025. Right now, markets are anticipating anywhere between two and four rate cuts this year, with the first coming this July.
Early in the year, many economists optimistically predicted that mortgage rates would gradually decline, potentially reaching 6% by the end of 2025. But economic uncertainty — sparked by Trump's aggressive tariff regime and fears of higher inflation and a potential recession — have thrown a wrench in those forecasts.
With so many unknowns in today's economy, experts say there are plausible scenarios for both upward and downward movement in rates by the end of the year
Why is the Fed holding off on interest rate cuts?
The central bank is responsible for maintaining maximum employment and containing inflation via adjustments to its benchmark interest rate. Usually, when prices go up too fast (inflation), the Fed raises interest rates to slow price growth and reduce spending by making borrowing more expensive. Then, when the economy shows signs of weakness and unemployment rises, the Fed tends to lower rates to boost demand and stimulate growth.
"Coming into the year, the Fed was prepared to cut rates if the labor market began to weaken, since it seemed like inflation risk had mostly eased," said Alex Thomas, senior research analyst at John Burns Research and Consulting. "Now, given the potential inflationary impact of wide-reaching tariffs, the Fed will be more hesitant to cut until the labor market weakens significantly.'
Trump's aggressive tariff agenda has created a dilemma for the Fed. On one side, tariffs act like a supply shock that makes prices go up, leading to more inflation, said Brett Ryan, senior economist at Deutsche Bank. On the other side, tariffs can slow down the economy and threaten jobs, Ryan said.
Since the Fed can't address both sides of its dual mandate at once, it will have to choose between keeping inflation in check and avoiding a severe recession.
Can mortgage rates still fall in 2025?
The big question hanging over the housing market is whether rates will rise due to tariff-induced inflation or fall due to a recession.
'The rapidly evolving tariff policy landscape has already prompted the Federal Reserve to recalibrate its outlook, revising up its forecasts for inflation and revising down its outlook for growth and employment this year,' said Kushi.
Typically, bad economic news tends to bring good news for mortgage rates. With a recession in 2025 looking more likely, rates could drop. The worry of a downturn can push mortgage rates down as investors often flock to safer investments like US Treasury bonds, which lowers long-term yields. However, given declining confidence in the US economy, that might not happen this time.
The most recent economic reports don't yet reflect a surge in unemployment, but layoffs and cutbacks can take time to appear in the data. The figures economists and the Fed rely on tell us what happened in the past, whereas investors act on what they anticipate for the future, said Logan Mohtashami, lead analyst at HousingWire.
Even if a recession brings down mortgage rates, the relief might be short-lived or irrelevant for households facing job losses and financial hardship.
Buy now? Or wait?
Today's rates may seem high compared to the 2% rates of the pandemic era. But experts say getting below 3% on a mortgage is unlikely without a severe economic downturn.
If you're waiting for mortgage rates to come down before buying, keep in mind that the large-scale economic issues affecting the housing market are beyond your control.
"Trying to time everything perfectly is a losing proposition. Rates could go up or they could go down," said Gregory Heym, chief economist at Brown Harris Stevens. "The question is: Do you want a home?"
If the answer is yes, experts recommend focusing on two key fundamentals:
Make a homebuying budget and stick to it: Creating a realistic homebuying budget can help you decide if you can handle the costs of homeownership, and provide you with some figures for how large your mortgage should be.
Shop around for mortgage rates: Each home loan lender offers different mortgage rates and terms. Comparing offers from multiple lenders can help you negotiate a better rate. If you can't snag a low rate but are ready to buy, you can always refinance down the road.
Watch this: 6 Ways to Reduce Your Mortgage Interest Rate by 1% or More
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