Rate cuts may be slower than expected as inflation and trade tensions persist
Fannie Mae’s latest economic forecast suggests that mortgage rates will likely remain volatile in 2025 as uncertainty surrounding inflation, trade policies, and economic growth continues to weigh on mortgage rate movements.
The Fannie Mae Economic and Strategic Research (ESR) Group revised its mortgage rate forecast upward, expecting rates to end 2025 at 6.6% and 2026 at 6.5%, reflecting persistent inflation risks and trade policy shifts. The group warned that mortgage rates could fluctuate in either direction, depending on economic data and government policy changes.
“Ongoing uncertainty around trade policy adds risk to our GDP and inflation outlooks, which may have implications for mortgage rates, although the direction – up or down – would depend on a number of factors,” said Kim Betancourt, vice president of multifamily economics and strategic research at Fannie Mae.
As of February 20, Freddie Mac reported that the average 30-year fixed mortgage rate stood at 6.85%, down slightly from 6.87% the previous week.
Betancourt added that the “lock-in effect,” which has kept many homeowners from selling due to existing low-rate mortgages, will likely continue if rates remain high.
“Higher mortgage rates would exacerbate the existing ‘lock-in effect’ and worsen affordability, which may then weigh on home sales and mortgage originations activity,” she said in the group’s latest commentary. “Of course, if mortgage rates move lower, we’d likely see an improvement in affordability and a corresponding pickup in housing activity.”
Fannie Mae adjusted its home sales outlook upward, citing a stronger-than-expected December sales pace and resilient purchase applications data. However, the level of existing home sales is still expected to be 22% below 2019 levels.
The ESR group maintained its GDP forecast at 2.2% for 2025, but it raised its consumer price index (CPI) projection from 2.5% to 2.8% due to higher-than-expected price increases.
The report also factored in the recently implemented 10% tariff on Chinese imports, which the ESR Group predicts will have a slight negative impact on economic growth and contribute to rising inflation.
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“Economic growth was strong to start the year as fourth quarter personal consumption data came in above our expectations,” said Betancourt. “Going forward, we expect the economy to decelerate slightly as consumer spending slows to a level more consistent with its historical relationship to income.”
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