Reasons and Reasoning
July 25, 2025 -- For the Federal Reserve to make a change in policy, there needs to be a reason to do so. If the economy is running too hot or financial conditions are too loose, the Fed will raise interest rates, as it did from 2003 to 2006. Among other reasons, rising interest rates helped tip over financial markets and the housing market, which had become overheated and increasingly dependent on short-term adjustable rate mortgages. When financial markets teetered and then fell over in 2008, the Fed slashed interest rates to near zero and held them there for years to combat deflationary forces, and to help the economy get its feet under it again.
Once it did (some years later), the Fed had reason to start to move policy away from emergency levels ("zero bound") and lifted rates by a cumulative 2.25 percentage points; ultimately, this was more than the economy could handle at that time, and some increases were rescinded. Now late 2019, the 1.75% rate for federal funds would likely have been gradually increased over time to a "neutral" level, then thought to be something around the 3% mark. Instead, the pandemic outbreak came, giving the Fed fresh reason to slash rates to zero again and restart bond-buying programs.
What also followed after a time was unprecedented fiscal stimulus, ranging from direct payments to folks to longer-range infrastructure projects. A flood of cash into the economy and economic re-opening after closure helped produce the worst bout of inflation in 40-odd years, giving the Fed reason to lift interest rates rapidly to try to stabilize inflation and get growth back to a more sustainable pace. After some success on both fronts, there was at least some reason to start to lower rates last fall, although an argument could be made that in hindsight it might have been better to wait or to move at a more gradual pace.
In each of these instances (and others) there have been reasons to make a change in monetary policy. The Fed's not infallible and of course makes mistakes, but there is usually at least a reason or justification for its actions.
Are there reasons to cut rates at the moment? This wouldn't appear to be the case, at least not strong ones. After a import-induced sputter in the first quarter, GDP growth looks to have cruised through the second quarter at somewhere near a 2% pace, a fair level and one that might actually be durable enough to see inflation gradually cool to target over time. While there are reasons to be a little concerned about labor conditions, the unemployment rate is quite low and the economy is pretty close to "full" employment. Any concerns stem from a slow pace of new hiring -- specifically, more folks being unemployed for longer -- but this isn't something you can directly attribute to the current level of the federal funds rate. Rather, it would appear that the reason for a lack of companies adding workers more quickly is "ongoing economic and policy uncertainty," as business contacts reported in the Fed's July Beige Book.
If inflation was moving steadily toward the Fed's 2% core PCE target, it might be a reason to cut rates now, but this isn't actually happening, and routine progress toward this goal stalled about a year ago. While certainly down from post-pandemic highs, core PCE hasn't been at or below target in over four years, stepping down only to as low as 2.5% last year and in turn allowing the Fed to cut rates by a full percentage point. With no real progress to be seen since then and considering the prospect of higher tariff-enhanced inflation for at least a period of time, there's little reason to make a move until the greater clarity starts to emerge.
Even when rate cuts may start to be more warranted, there may not be many coming, provided the economy keeps performing as above. Minutes of the last Fed meeting noted "Several participants commented that the current target range for the federal funds rate may not be far above its neutral level," a policy stance that neither restricts economic conditions nor provides stimulus.
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So if there aren't compelling reasons for the Fed to cut interest rates right now, at least based on the available data, what's the reasoning for some to call for them to be trimmed, or even slashed to 1%, as President Trump has called for? Certainly, it's not about lower rates for consumer loans, home equity lines of credit and the like, and the Fed cutting rates at a time when inflation isn't as contained as it might be seems more likely to lift long-term yields and mortgage rates rather than lower them. It might be reasoned that, since monetary policy moves take time to work their way through the economy, cutting now may be a kind of preemption against a future weakening labor market, but per the above Beige Book statement, it's not the cost of money that's holding back labor conditions at the moment, but uncertainty. The longer uncertainty persists, the harder it is for businesses to plan for labor needs, regardless of the level of the federal funds rate.
The president's reasoning for lower policy rates has been laid bare on several occasions. "High" policy rates are costing the U.S. "hundreds of billions of dollars" in debt-service payments on the trillions of bonds, notes and bills the U.S. has issued and continues to issue. But unless the Treasury plans to sell only very short-term bills and notes (and investors are willing to snap them up) there's no way to know if longer-term yields -- driven by market forces -- would also come down and meaningfully impact U.S. debt-service costs, or mortgage rates, or other market-based rates. To the extent that faster growth might exacerbate price pressures or make them more durable, the opposite may actually occur, or the decline not be a meaningful one.
If the president desires lower interest rates, arguably the best path to follow would be one where the U.S. fiscal policy is looking to close yawning deficits, reduce borrowing and to more carefully consider the inflationary impact of trade policy and tariffs. As well, it bears considering that had the president simply held off on instituting the April "Liberation Day" tariff announcements to say, October, that he might already have seen a cut (March) or one could be expected to come this month, and perhaps another in September, too. Lower rates would already have likely been in place before any uncertainty was injected into the economy.
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Lower rates will eventually come, but absent economic tragedy, they aren't headed back to 1% anytime soon. With "neutral" rates perhaps not far off, it may be that there are only measured trims in interest rates when the Fed does start to lower them. Futures markets place only about a 3% chance of a cut by the Fed next week, but there's still about a 66% probability of one come September. Time will tell.
The economic data out this week weren't exactly stellar but close enough to recent trends as to not be especially concerning. For example, the Conference Board's index of Leading Economic Indicators posted a -0.3 reading for June, a slightly greater decline than was expected after the May figure was upwardly revised to zero. While the sub-par June number isn't good, there have been only a couple of non-negative values in this series since February of 2022, so it's not especially alarming. As well, this indicator has flashed a recession signal on several occasions since then, even as the economy has performed at a solid and occasionally robust pace over that time.
The National Activity Index from the Federal Reserve Bank of Chicago was also sub-par for June. Although the -0.10 reading for this amalgam of some 85 economic indicators is still below breakeven, it was improved relative to the -0.16 for May and the strongest reading in the last three months. The NAI seeks to show if the economy is growing above or below its "potential", or ability to grow without becoming imbalanced. "Potential" is thought to be a GDP or perhaps as high as 2.4%, but this is a moving target and it may be somewhat lower. The initial estimate of second quarter GDP is being released next week, and should be in the 2% range suggested by the Atlanta Fed's GDPNow and New York Fed's Nowcast models. If so, the NAI would be about on point for the period overall, posting a -0.22 value for the April-June period.
Home sales remained muted as the spring came to a close. Per the National Association of Realtors, existing home sales retreated by 2.7% in June, falling to a 3.93 million annualized pace, the slowest existing home sales have been since last September. While high mortgage rates are partly to blame for sluggish sales, high home prices are contributing to a lack of affordability, too. Despite slow sales, the median price of an existing home sold set a new all-time record high of $435,300 in June, up 2% from the previous record in June 2024. More homes for sale have been coming onto the market; while inventories of homes up for sale were 0.6% lower in June compared to May, the 1.53 million properties available last month was about 16% higher than a year-ago level. With inventory levels of available homes rising, finding a home to buy is becoming much less the story than affording one. To that end, and with more homes coming on market, we may see some more pronounced seasonal cooling in home prices this year as sellers in at least some markets look to get deals done.
Sales of new homes have been sluggish, too, plummeting in May after April's tariff shock. However, they managed a slight rebound for June, rising by 0.6%, edging up from May's 623,000 annual rate to June's 627,000 clip. Inventories of new homes available to purchase hasn't been an issue for some time, and the 9.8 months of supply at the present rate of sale is certainly plenty enough. The 511,000 (annualized) units available is the most since October 2007, and the median price of a new home sold last month was actually 2.8% lower than a year ago at $401,800. Where available, new construction is competing very favorably against the existing market, and that even before any builder financing sweeteners.
Requests for mortgage credit rose by 0.8% in the week ending July 18, according to the Mortgage Bankers Association. Applications for funds to purchase homes popped higher by 3.4%, while those for mortgages to replace existing loans declined by 2.6%. Mortgage rates have been mostly unchanged over the last few weeks so there's been little reason for potential borrowers to rush to their nearest mortgage lender to secure a new loan.
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First-time claims for unemployment benefits continued in their recent pattern of diminishment in the week ending July 19, declining by 4,000 from the prior week to just 217,000. This is the lowest figure since mid-April and a sixth straight week of retreat from a recent peak. Similar progress was seen in the number of folks receiving ongoing benefits as the 1.951 million recipients was 5,000 fewer than the week-ago figure. While it would be good to see this number declining steadily, at least the number of folks losing jobs is falling, and fewer initial claims should eventually mean fewer ongoing ones.
A couple of regional looks at manufacturing activity found a mixed bag, as the Federal Reserve Banks of Richmond and Kansas City reported in for July this week. Richmond's activity gauge was still negative, but only modestly so at -2 for the month. This was also an improvement of sorts compared to a June's -8 mark. That said, the components of the report were rather less encouraging, as new orders plummeted by 13 points from an already soft -12 last month to -25 in this one. Employment conditions slumped as well, with this measure declining 10 points to land at -16. Prices paid (an indicator of inflation) did manage a modest retreat, but since the slight downward movement comes after a two-year high for this component just a month ago, it's not as though price pressures have evaporated.
Out in the Fed's Tenth District, the KC Fed's similar barometer was modestly more encouraging. The top-line indicator moved up three points from -2 in June to +1 in July. While not much to get excited about it nonetheless was the first positive reading seen here since September 2022 The four-point increase in new orders lifted it from -2 to +2, the first positive number for new orders in three years. Labor conditions didn't follow suit, though, retreating three points to -11 for the July. Prices paid did step back a little, although the 8 point decline only returned this measure to a value of 68, back where it was two months ago.
Current Adjustable Rate Mortgage (ARM) Indexes
| Index | For The Week Ending | Year Ago | |
|---|---|---|---|
| Jul 18 | Jun 20 | Jul 19 | |
| 6-Mo. TCM | 4.31% | 4.31% | 5.23% |
| 1-Yr. TCM | 4.09% | 4.09% | 4.86% |
| 3-Yr. TCM | 3.88% | 3.90% | 4.23% |
| 10-Yr. TCM | 4.46% | 4.40% | 4.20% |
| Federal Cost of Funds |
3.677% | 3.662% | 3.969% |
| 30-day SOFR (daily value) | 4.34899% | 4.30218% | 5.33774% |
| Moving Treasury Average (MTA/12-MAT) |
4.221% | 4.308% | 5.163% |
| Freddie Mac 30-yr FRM |
6.77% | 6.77% | 6.78% |
| Historical ARM Index Data | |||
Orders for durable goods throttled back to close the second quarter, declining by 9.3% in June. The pullback was expected after a 16.5% blowout increase in May, and the reason for the decline was largely the reason for the prior increase, chiefly the impact of orders for civilian aircraft, which boomed in May and fell back in June. However, the decline in orders wasn't solely due to transportation-related items, as so-called "core" durable goods orders (no military orders, no planes) declined by 0.7%, erasing some of the sold 2% increase seen in May. Core durable orders have swung from increases to decreases since the turn of the year.
The Fed meets next week to consider monetary policy, and there doesn't seem to be much reason to expect any change in policy despite the reasoning of some. That said, there's likely to be somewhat more spirited discussion regarding policy, something we may see when the minutes are released in mid-late August, and while we don't think there will be any official dissenters to holding policy steady next week, it does remain a possibility.
At the same time, it should be fully expected that the president's and administration's pressure on the Fed will continue, and that would very likely be the case even if the Fed was to lower rates next week. After the meeting closes, there is a slew of end-of- and first-of-the-month economic data out, including the June update for PCE prices, July employment report and more. A busy week is on tap for the financial markets, no doubt.
As far as mortgage rates go, they have been hanging around present levels for the last three weeks now, wandering aimlessly despite some underlying volatility. Given that the influential yield on the 10-year Treasury closed the week a little below where it started it, it stands to reason that we'll see a decline in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac of 2-4 basis points.
Spring has given way to the lazy days of summer, but what's the outlook for mortgage rates between now and September? Check out our latest Two-Month Forecast for mortgage rates covering July and August.
See our 2025 Mortgage and Housing Market Outlook, covering mortgage rates, housing conditions, the Fed and lots more. Our mid-year review of our expectations is coming next week.
Also, for a really long-run outlook, you'll want to review "Federal Reserve Policy and Mortgage Rate Cycles".
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