You’ll probably be disappointed if you are looking to buy a house and waiting for lower rates this year.
“Interest rates took the elevator going up, but they’ll be taking the stairs coming down,” said Greg McBride, Bankrate’s Chief Financial Analyst. “Interest rates won’t fall fast enough to bail you out of a tight situation.”
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When we talk about Fed rates, we refer to the Fed funds target rate, which is the interest rate at which banks lend to each other overnight, a rate that impacts a wide variety of financial products. The mortgage rate, the interest rate on home loans, often moves in the same direction as the fed rate, though not always like this.
The Fed funds rate had been at a 23-year high since July 2023 until last September, when the Fed finally began lowering rates. It then reduced rates again in its November and December meetings, with a total cut of one percentage point across the three adjustments.
At its latest January meeting, the Fed left the rate unchanged, signaling a cautious approach to future cuts.
The current interest rate target level is 4.25% to 4.5%. Market expectations, as tracked by the CME FedWatch Tool, show only a 16.5% chance of a March rate cut of 25bps, while 83.5% of bets favor the Fed holding steady.
Trump’s tariff adds uncertainty to inflation
The Fed typically cuts interest rates when inflation is low or the economy weakens, making borrowing cheaper to encourage spending and investment.
But right now, the challenge could be that inflation has come down from its peak in 2022, but uncertainty—like tariffs—could push prices back up, making the Fed hesitant to cut rates too quickly.
The personal consumption expenditures index (PCE) was up 2.6% from a year earlier in December, according to data from the Bureau of Economic Analysis last week. It was the biggest gain in seven months and followed a 2.4% rise in November. The Fed’s preferred inflation target is 2%.
Related: Inflation report upends Fed interest rate cut bets in 2025
“With still stubborn inflation and a very strong economy and labor market, as the Federal Reserve suggested on Wednesday, more time is needed to allow inflation to settle down before the Fed can cut rates again,” said Clark Bellin, president and chief investment officer at Bellwether Wealth in Lincoln, Nebraska.
Last weekend, President Donald Trump signed executive orders imposing 25% tariffs on imports from Canada and Mexico and 10% on goods from China. That means products imported from these regions will be more expensive.
The tariffs on Canada and Mexico were deferred after negotiations. Still, the ones on China took effect at 12:01 a.m. EST on Feb. 4. Soon after, China announced retaliatory tariffs on select American imports.
Who pays for U.S. tariffs? A 2020 working paper from the National Bureau of Economic Research concluded that “U.S. tariffs continue to be almost entirely borne by U.S. firms and consumers.”
Now, that question arises again, and you will probably feel the answer with your iPhone in hand.
Related: Analysts reset Apple stock price targets amid earnings, Trump tariffs
Apple may be the most exposed to tariff risks among tech giants as many of its products are assembled in and shipped from China.
Rosenblatt analyst Barton wrote that he expected Apple to pass price increases to consumers, according to CNBC.
Morgan Stanley now sees fewer rate cuts in 2025
Morgan Stanley trimmed its interest rate cut outlook for 2025 following Trump tariffs.
“On-again-off-again tariff uncertainty should raise the hurdle for Fed cuts,” Morgan Stanley said.
Morgan Stanley, which previously looked for 25bp cuts in March and June, now tentatively looks for only one rate cut this year in June.
The firm’s previous forecast of two rate cuts was based on the assumption of slow tariff implementation and a preference for tariffs on China rather than trading partners.
But the tariffs took effect much sooner than the firm had expected.
More Wall Street Analysts:
- Goldman Sachs analysts warn on Trump tariff impact for stocks
- Analyst predicts stocks likely to join the S&P 500 in 2025
- Every major Wall Street analyst’s S&P 500 forecast for 2025
“Imposing tariffs more quickly than we assumed would likely mean disinflation halts at a higher pace of inflation, blocking any near-term path to cuts,” Morgan Stanley explained.
Even if tariffs are avoided, Morgan Stanley thinks the tariff potential will keep inflation risks “tilted to the upside.”
Related: Veteran fund manager issues dire S&P 500 warning for 2025
