"The top economist at J.P. Morgan believes the Federal Reserve is done cutting interest rates and will hold policy steady through 2026, with the next move likely a hike in 2027," reported The New York Post on Wednesday. That sounds bad for mortgage rates, but it could affect them less than many might think.
What JP Morgan Said
Michael Feroli, JP Morgan's chief U.S. economist, wrote in a client note this week, "We now expect the Fed to hold rates throughout 2026 with the next move to hike later in 2027," according to a quote from Realtor.com.
Feroli later appeared on CNBC to explain his thinking, and the video is available on YouTube. In summary, he argued that inflation may well remain elevated through 2026, while the economy looks set to grow this year.
If his inflation and growth forecasts turn out to be right, the Fed may well resist further cuts for the next 12 months, and the next time it changes interest rates, in 2027, it could opt for a hike.
The Fed's monetary policy goals are to balance and minimize unemployment and inflation. A growing economy typically deals with unemployment, but prices are currently rising faster than the central bank's 2% annual target.
But an economy that runs too hot (grows too quickly) risks stoking inflation. And that's the last thing the Fed wants to do. Hence, its reluctance to cut rates now.
Why JP Morgan Might Be Wrong
Feroli is sticking his neck out with his Fed rate predictions. It's true, though, that few investors are expecting a cut anytime soon.
The next time a majority of investors currently anticipate such a cut is this June, according to the CME FedWatch tool. But that's well before Feroli thinks there will be one.
The fact is, economies can turn on a dime. And the most sophisticated modeling by economists and analysts can't predict the future with any level of certainty. To be fair, Feroli cheerfully acknowledges he could be wrong.
The Fed Rate Only Mildly Influences Mortgage Rates
In the run-up to every meeting of the Fed's rate-setting committee, we see mortgage rates rising, falling, or staying the same in anticipation of a hike, cut, or holding steady in the Federal Funds Rate. So, there's no point in pretending that the Fed rate doesn't affect mortgage rates at all.
But its role is highly limited. The Federal Funds Rate is the only rate the Fed directly controls. But it's widely used by banks and other lenders when they calculate and adjust their base rates. So, changes directly affect most variable-rate loans, including credit card borrowing and adjustable-rate mortgages. However, most mortgages have fixed rates, so they are unaffected.
Here's how the Fed itself describes its rate:
"The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances."
In other words, the Fed Funds Rate is an overnight rate. And mortgage rates are long-term loans, often lasting 30 years. The two couldn't be more different.
Rates Could Still Fall, Even Without the Fed Rate Changing
That's why the Fed rate has only a limited influence on mortgage and refinance rates. And we shouldn't be a bit surprised if mortgage rates were to dip below 6% in the coming days, weeks, or months, regardless of the Federal Funds Rate.
For example, President Trump recently instructed Fannie Mae and Freddie Mac to purchase $200 billion in mortgage-backed bonds in order to help drive mortgage rates down.
Mind you, we shouldn't be surprised to see them rising, either. Markets and rates are inherently unpredictable, and there's no point in stressing over what's coming next.
