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Goldman Sachs Forecasts 3 Interest Rate Cuts From Fed in 2025

April 18, 2025 by Marco Santarelli

Goldman Sachs Forecasts 3 Interest Rate Cuts From Fed in 2025

Ever wonder what the smart money on Wall Street is thinking about the future of our economy? Well, here's a headline that's got my attention: Goldman Sachs forecasts three rate cuts from the Federal Reserve in 2025. That's right, one of the biggest names in finance is predicting that the folks in charge of keeping our economy on track will be lowering interest rates not once, not twice, but three times next year.

This move, if it happens, would mean a total reduction of 0.75 percentage points in the federal funds rate. Now, this isn't just a random guess; it's a prediction rooted in some pretty significant economic factors, particularly the expected fallout from President Trump's recently implemented tariffs. While the Fed itself is currently projecting only two rate cuts, this difference in opinion signals a potentially bumpy road ahead and some crucial decisions for our financial future. Let's dig deeper into what this all means for you, me, and the wider economy.

Goldman Sachs Forecasts Three Interest Rate Cuts From Fed in 2025

Understanding the Basics: Why Rate Cuts Matter

Before we get into the specifics of Goldman's forecast and its implications, let's quickly recap why these interest rate adjustments by the Federal Reserve are such a big deal. Think of the Fed's main job as keeping the economy humming along smoothly. They have a couple of key tools to do this, and one of the most powerful is the ability to influence borrowing costs through the federal funds rate.

  • What is the federal funds rate? It's the target rate that banks charge each other for the overnight lending of reserves.
  • How do rate cuts help? When the Fed cuts this rate, it becomes cheaper for banks to borrow money. These lower costs tend to trickle down to us in the form of lower interest rates on things like car loans, mortgages, and business loans. This can encourage people to spend more, and businesses to invest and hire, which can help to boost a slowing economy.
  • Why would the Fed cut rates? Typically, the Fed cuts rates when they are worried about the economy slowing down too much or when inflation (the rate at which prices for goods and services increase) is too low.

So, when a major player like Goldman Sachs predicts multiple rate cuts, it suggests they see potential headwinds for the economy in the coming year.

The Current Economic Picture: A Bit of a Mixed Bag

As we sit here in the early part of 2025, the economic landscape feels a little like a seesaw. On one hand, we've seen some encouraging signs.

  • Solid Growth: The economy actually grew at a decent pace in the last part of 2024, with a 2.4% increase in GDP. That's not bad at all and suggests the economy had some momentum heading into this year.
  • Relatively Controlled Inflation: While inflation at 2.8% is still a bit above the Federal Reserve's ideal target of 2%, it has come down from earlier highs. Core inflation, which takes out some of the more volatile food and energy prices, is around 3.1%. This suggests that while prices are still rising, the pace has slowed somewhat.
  • Low Unemployment: The job market has remained pretty strong, with unemployment rates staying relatively low.

However, there are definitely clouds on the horizon, and these are likely what's fueling Goldman Sachs' more dovish outlook.

  • Trump's Tariffs: A Potential Game Changer: The big wild card right now is the set of tariffs that President Trump has recently put in place. These include significant tariffs on goods coming from some of our biggest trading partners, like 25% on imports from Canada and Mexico and 10% on goods from China. There's also talk of reciprocal tariffs down the line.
  • Weakening Consumer Confidence: I've noticed that people seem a bit more uneasy about the future. The University of Michigan's survey of consumer sentiment, for example, showed a noticeable drop recently, with folks expressing concerns about rising prices. This makes sense, as tariffs often translate to higher costs for consumers.

The Tariff Trouble: Why Goldman Sachs is More Concerned

In my opinion, the tariffs are the key reason why Goldman Sachs is anticipating more aggressive action from the Fed compared to the Fed's own projections. Here's how I see these tariffs potentially shaking things up:

  • Higher Prices for Everyday Goods: Think about it – when a hefty tax (that's essentially what a tariff is) is slapped on imported goods, those costs are often passed on to us, the consumers. This means we could see higher prices for everything from cars and electronics to building materials and even groceries if imported ingredients become more expensive. Goldman Sachs is likely factoring in a significant increase in consumer prices due to these tariffs. For example, the potential 10-20 cent increase per gallon of gas due to tariffs on Canadian crude oil is something that would hit everyone's wallet.
  • Slower Economic Growth: Tariffs can also hurt businesses. They might face higher costs for imported components, making their products more expensive. This can lead to reduced sales, lower profits, and potentially even job losses. Furthermore, other countries might retaliate with their own tariffs on American goods, making it harder for U.S. companies to sell their products overseas. Goldman Sachs likely believes that these tariffs will significantly dampen economic growth in 2025, potentially even increasing the probability of a recession to 35%.
  • Increased Uncertainty: Businesses and consumers don't like uncertainty. When the rules of trade are in flux due to tariffs, it can make it harder for businesses to plan for the future and for individuals to make big purchasing decisions. This can lead to a general slowdown in economic activity.

The Fed's Perspective: A More Cautious Approach

Now, let's look at why the Federal Reserve seems to be taking a more measured approach, currently projecting only two rate cuts in 2025. From what I can gather, they are likely balancing a few key factors:

  • Still-Elevated Inflation: Even though inflation has come down, it's still above their 2% target. The Fed is very careful about letting inflation become entrenched, as it can be difficult to bring back down. They might want to see more concrete evidence that inflation is firmly under control before they start cutting rates aggressively.
  • Current Economic Strength: Despite the concerns about tariffs, the economy has shown some resilience. The Fed might be waiting to see the actual impact of the tariffs on economic data before making significant moves. They might be thinking, “Let's wait and see how bad it really gets before we hit the panic button.”
  • Avoiding Premature Action: The Fed knows that once they start cutting rates, it can be harder to reverse course if inflation suddenly picks up again. They might prefer to be more cautious and see how things play out before making significant policy changes. As Fed Chair Jerome Powell himself said, “It's really hard to know how this is going to work out,” highlighting the uncertainty surrounding the tariff impacts.

According to their March 2025 projections (the “dot plot”), the Fed expects the fed funds rate to come down by 0.50 percentage points in 2025, implying two 0.25 percentage point cuts. They also anticipate that real GDP growth will slow to 1.7% for the year.

The Discrepancy: Who's Right and What Does it Mean?

The difference between Goldman Sachs' prediction of three rate cuts and the Fed's projection of two highlights the significant uncertainty surrounding the economic outlook for 2025. So, who is more likely to be right?

In my opinion, both sides have valid points. Goldman Sachs is likely placing a greater weight on the potential negative impacts of the tariffs on growth and inflation. They might see a scenario where the tariffs lead to a more significant economic slowdown, forcing the Fed to act more aggressively to stimulate the economy. Their forecast of rate cuts in July, September, and November suggests they anticipate a more immediate and pronounced negative impact from the tariffs. They've even downgraded their GDP growth forecast to 1.5% from 2.0% due to these concerns.

The Fed, on the other hand, seems to be taking a more data-dependent approach. They might want to see concrete evidence of a significant economic slowdown or a more pronounced drop in inflation before they deviate from their current plan of two rate cuts. They are likely trying to balance the risks of slowing growth against the risk of allowing inflation to remain too high.

The fact that there's such a notable difference in opinion from a major financial institution like Goldman Sachs underscores the volatility and risks that investors need to be aware of. It suggests that the economic path forward is far from certain.

What This Means for You and Your Money

So, how does all of this potential back-and-forth on interest rates affect your everyday life and your investments? Here are a few things to keep in mind:

  • Borrowing Costs: If the Fed does end up cutting rates more aggressively (closer to Goldman's forecast), you could see lower interest rates on things like mortgages, car loans, and personal loans. This could make it cheaper to borrow money for big purchases. However, it's important to remember that other factors besides the federal funds rate also influence these rates.
  • Savings and Investments: Lower interest rates generally mean lower returns on savings accounts and some fixed-income investments like bonds. On the other hand, lower rates can sometimes boost the stock market as they make borrowing cheaper for businesses and can make bonds less attractive relative to stocks. However, the uncertainty surrounding the reasons for the rate cuts (like a potential economic slowdown due to tariffs) can also create volatility in the stock market. We've already seen some market jitters in response to tariff-related news.
  • Inflation and Purchasing Power: As mentioned earlier, tariffs can lead to higher prices, which erodes your purchasing power. Even if the Fed cuts rates, if prices are rising faster than your wages, you'll still feel the pinch. It's a tricky balancing act.
  • Job Market: A significant economic slowdown, potentially exacerbated by tariffs, could lead to a weaker job market. If Goldman Sachs' more pessimistic outlook proves correct, we could see higher unemployment rates down the line.

Navigating the Uncertainty: My Thoughts and Advice

As someone who keeps a close eye on these economic developments, I think the next year or so is going to be interesting, to say the least. The interplay between the tariffs, inflation, and the Federal Reserve's response is going to be crucial.

My personal take is that Goldman Sachs' concerns about the tariffs are valid. Historically, tariffs have often led to higher prices and disruptions in trade, and there's no reason to believe this time will be significantly different. While the Fed's cautious approach is understandable given the current inflation levels, they might find themselves having to react more forcefully if the economic fallout from the tariffs is more severe than they currently anticipate.

Here's my advice for navigating this uncertain environment:

  • Stay Informed: Keep an eye on economic news and data, particularly reports on inflation, GDP growth, and consumer sentiment. Pay attention to what the Fed and major financial institutions like Goldman Sachs are saying.
  • Review Your Finances: Take a look at your personal financial situation. Are you heavily reliant on borrowing? If so, consider how potential interest rate changes might affect you. Are you concerned about rising prices? Think about ways to budget and potentially reduce your expenses.
  • Diversify Your Investments: If you have investments, make sure your portfolio is well-diversified across different asset classes. This can help to cushion the impact of market volatility.
  • Don't Panic: It's easy to get caught up in the day-to-day market swings, but try to maintain a long-term perspective. Economic cycles are normal, and there will always be periods of uncertainty.

Ultimately, the future is uncertain, and economic forecasts are just that – forecasts. However, the differing views of the Federal Reserve and a major player like Goldman Sachs serve as a reminder that there are significant risks and uncertainties in the current economic environment. Keeping a close eye on developments and being prepared for different scenarios is always a wise approach.

What It Means for Investors?

Three interest rate cuts in 2025—a major shift that could impact real estate and investment opportunities.

Lower rates mean cheaper financing and greater affordability for real estate investors. Take advantage of high-growth markets before demand surges!

Speak with our expert investment counselors (No Obligation):

(800) 611-3060

Get Started Now 

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Stagflation Alert: Economist Survey Predicts Weak Q1 GDP Due to Tariffs

March 31, 2025 by Marco Santarelli

Stagflation Alert: Economist Survey Predicts Weak Q1 GDP Due to Tariffs

Ever get that uneasy feeling, like something just isn't quite right with the way things are going? That's the vibe I'm getting when I look at the latest economic forecasts. A recent CNBC survey of 14 economists points to a significant slowdown in growth, with the economic growth in the first quarter of this year projected to be a meager 0.3%. This sluggish pace, the weakest since the pandemic recovery, is largely attributed to the chilling effect of new tariffs, which appear to be creating conditions ripe for stagflation – a nasty combination of slow growth and persistent inflation.

Economist Survey Predicts Weak Q1 GDP Due to Tariffs

It feels like just yesterday the economy was showing some decent momentum, but these new numbers paint a starkly different picture. Seeing growth plummet from the previous quarter's 2.3% to a near standstill is definitely cause for concern. And the fact that core inflation, as measured by the Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred gauge, is expected to remain stubbornly high around 2.9% for most of the year only adds fuel to this worrying outlook.

Why the Sudden Slowdown? The Tariff Tango

From where I'm sitting, the main culprit seems pretty clear: the uncertainty and the actual implementation of new, sweeping tariffs from the current administration. It's like throwing sand in the gears of the economic machine. Businesses become hesitant to invest, and consumers, facing potentially higher prices, tighten their purse strings.

We're already seeing signs of this in the real economic data. The Commerce Department recently reported that inflation-adjusted consumer spending in February barely budged, rising by a paltry 0.1%, following a 0.6% decline in January. This is a significant drop from the robust spending growth we saw in the last quarter of the previous year. As Barclays economists noted, the earlier decline in sentiment is now translating into a tangible slowdown in economic activity.

Another factor playing a role is a noticeable surge in imports. Now, on the surface, more goods coming into the country might seem like a good thing. However, in the context of impending tariffs, it appears businesses are rushing to bring in goods before the higher taxes kick in. While this might offer some short-term relief in terms of supply, these imports actually subtract from the GDP calculation. It's a bit of a temporary distortion, but it contributes to the weak first-quarter growth number.

Stagflation's Shadow: A Looming Threat

The prospect of stagflation is particularly troubling. Think about it: slow economic growth means fewer job opportunities and potentially stagnant wages. At the same time, persistent inflation erodes the purchasing power of the money we do have. It's a squeeze on both ends, and it can be incredibly difficult to break free from.

The CNBC survey highlights that core PCE inflation isn't expected to fall convincingly until the very end of the year. This stubbornness will likely tie the Federal Reserve's hands. While the market might be hoping for interest rate cuts to stimulate the slowing economy, the Fed will be hesitant to lower rates while inflation remains well above their target. It's a tricky situation, a real balancing act with potentially significant consequences.

Not All Doom and Gloom? A Glimmer of Hope

It's important to note that not all economists are predicting a complete downturn. The survey indicates that only a couple of the 12 economists who provided specific growth numbers for the first quarter foresee negative growth. And importantly, none are forecasting consecutive quarters of contraction, which is often a key indicator of a recession.

Oxford Economics, for instance, while having one of the lowest Q1 growth estimates (-1.6%), anticipates a rebound in the second quarter, projecting GDP growth to bounce back to 1.9%. Their reasoning is that the surge in imports during the first quarter will eventually translate into positive contributions to growth as these goods are either added to inventories or sold to consumers. It's a bit of a delayed effect.

Recession Risks on the Rise

Despite the hopes for a rebound, the margin for error looks slim. An economy growing at a snail's pace of 0.3% is incredibly vulnerable to any further shocks. And with the new tariffs expected to be implemented this week, the risks of slipping into negative territory have definitely increased.

As Mark Zandi of Moody's Analytics aptly put it, even though their baseline forecast doesn't show a decline in GDP, the mounting global trade war and potential cuts to jobs and funding create a “good chance GDP will decline in the first and even the second quarters of this year.” He further warns that a recession becomes likely if the president doesn't reconsider the tariffs by the third quarter. That's a pretty stark warning from a respected economist.

Moody's Analytics themselves are projecting a slightly better first quarter growth of 0.4%, with a rebound to 1.6% by the end of the year. However, even this more optimistic scenario still represents growth that is modestly below the long-term trend.

My Take: Navigating Choppy Waters

Personally, I find these forecasts deeply concerning. While I understand the arguments sometimes made in favor of tariffs – like protecting domestic industries – the potential for widespread economic disruption and the creation of stagflationary conditions seem to outweigh any perceived benefits in this current climate.

The interconnected nature of the global economy means that tariffs rarely have a unilateral effect. They often lead to retaliatory measures from other countries, resulting in a trade war that hurts businesses and consumers on all sides. The uncertainty created by these policies also discourages investment, which is crucial for long-term economic growth and job creation.

The fact that inflation is proving to be so sticky further complicates matters. The Federal Reserve's usual toolkit for dealing with slow growth – lowering interest rates – becomes less effective when inflation is still a significant problem. They risk further fueling price increases if they ease monetary policy prematurely.

Looking Ahead: A Need for Course Correction?

The coming months will be critical. We'll need to closely monitor economic data, particularly consumer spending, business investment, and inflation figures, to see if the anticipated rebound materializes or if the risks of a more significant downturn become reality.

It seems to me that a reassessment of the current trade policies might be necessary to avoid potentially serious economic consequences. Finding ways to foster international trade and cooperation, rather than erecting barriers, could be a more sustainable path to healthy economic growth.

In the meantime, businesses and individuals will need to navigate this period of uncertainty with caution. For businesses, this might mean carefully managing costs and delaying major investment decisions. For individuals, it could mean being mindful of spending and saving where possible.

The economic forecast for the first quarter serves as a stark reminder that policy decisions have real-world impacts. I sincerely hope that policymakers take these warnings seriously and consider adjustments to avoid the specter of stagflation becoming a reality.

Work With Norada – Build Wealth

With economists warning of stagflation and weak Q1 GDP due to tariffs, now is the time to invest in stable, income-generating real estate for financial security.

Norada’s turnkey rental properties provide consistent cash flow and long-term wealth, no matter the economic climate.

Speak with our expert investment counselors (No Obligation):

(800) 611-3060

Get Started Now

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Filed Under: Economy, Stock Market Tagged With: Economic Forecast, Economy, Federal Reserve, GDP, inflation, Stagflation, Tariffs

Goldman Sachs Significantly Raises Recession Probability by 35%

March 31, 2025 by Marco Santarelli

Goldman Sachs Significantly Raises Recession Probability by 35%

It seems like the economic ride might be getting a little bumpy. Just recently, investment giant Goldman Sachs raised its 12-month US recession probability quite significantly, jumping from a previous estimate of 20% all the way up to 35%. This isn't exactly comforting news, and it's got a lot of us wondering what's going on and what it might mean for our wallets. The big finger seems to be pointing at President Donald Trump's tariff policies, announced around March 31, 2025, as the main culprit behind this increased worry.

Now, I'm no Wall Street guru, but I've been keeping a close eye on the economy, just like many of you. When a big player like Goldman Sachs starts talking about a higher chance of recession, it's usually worth paying attention. Their analysts have access to a ton of data and expertise, so their revised outlook suggests some real concerns are brewing beneath the surface of our economy.

Goldman Sachs Significantly Raises Recession Probability by 35%

Why the Sudden Jump in Recession Fears?

So, what exactly made Goldman Sachs change their tune so drastically? From what I gather, the main worry stems from the potential fallout of these new tariffs. Think about it like this: when the government puts taxes on goods coming into the country, it can lead to a chain reaction that nobody really wants.

Here are some of the key concerns that likely fueled Goldman Sachs's increased recession probability:

  • Inflation Might Get Worse: Tariffs basically make imported goods more expensive. Businesses that rely on these imports might have to raise their prices to cover the extra cost, and guess who ends up paying more? That's right, us consumers. Higher prices for everyday things can really squeeze household budgets and lead to less spending overall.
  • Other Countries Might Hit Back: International trade is a two-way street. If we slap tariffs on goods from other countries, they might decide to do the same to our exports. This kind of tit-for-tat can hurt American businesses that sell their products overseas, leading to lower profits and potentially even job losses. This is what economists call trade retaliation, and it's a serious worry.
  • Slower Economic Growth Looks More Likely: When businesses face higher costs and the risk of retaliatory tariffs, they might become hesitant to invest in new projects or hire more workers. Consumers, facing higher prices, might also tighten their belts and spend less. This slowdown in both business and consumer activity is a recipe for weaker economic growth, and if it gets bad enough, it can tip us into a recession.

Looking at the Numbers: What the Data Tells Us

It's not just Goldman Sachs ringing alarm bells, either. Some of the recent economic data also paints a somewhat concerning picture. For instance, the Conference Board's Leading Economic Index (LEI), which is designed to predict future economic activity, actually declined slightly in February 2025. This suggests that there might be some headwinds facing the economy in the months ahead.

Now, it's important to remember that economic forecasts aren't set in stone. They're based on the best information available at the time, but things can change quickly. For example, Deloitte Insights put out a forecast for 2025 that had a baseline expectation of 2.6% real GDP growth. That sounds pretty decent, right? However, they also looked at a scenario where these trade tensions really escalate into what they called “trade wars,” and in that case, they predicted growth could drop to just 2.2%. That small difference might not sound like much, but it can have a significant impact on the overall health of the economy.

Think of it like driving a car. If the road ahead is clear, you can cruise along at a good speed. But if you see storm clouds gathering and the road starts to get a little slippery, you're probably going to ease off the gas pedal. That's kind of what these economic indicators are suggesting – the road ahead might be getting a bit more challenging.

My Take on the Situation: More Than Just Numbers

As someone who tries to understand how these big economic shifts affect everyday life, this news from Goldman Sachs makes me a little uneasy. It feels like we're entering a period of greater uncertainty, and that can have a real impact on how people feel about their jobs, their savings, and their future.

I've always believed that international trade, when done fairly, can be a good thing for everyone. It allows businesses to access a wider range of goods and services, and it can create opportunities for growth and innovation. When we start throwing up barriers in the form of tariffs, it disrupts these established relationships and creates new costs and risks.

It's also worth remembering that these policies don't exist in a vacuum. Other countries are going to react, and those reactions can have unintended consequences for us here at home. We've seen this play out in the past, and it's rarely a smooth or painless process.

Will the Federal Reserve Come to the Rescue?

One interesting aspect of Goldman Sachs's report is their expectation that the Federal Reserve (also known as the Fed) will likely step in to try and cushion the blow. They're now predicting that the Fed will cut interest rates three times in 2025, which is more aggressive than their previous forecast of two cuts.

Why would the Fed do this? Lowering interest rates can make it cheaper for businesses to borrow money and invest, and it can also make it cheaper for consumers to take out loans for things like cars or houses. This can help to stimulate economic activity and potentially offset some of the negative effects of the tariffs.

However, the Fed is in a tough spot. They're also trying to keep inflation under control. If they cut rates too aggressively, it could actually make inflation worse. It's a delicate balancing act, and there's no guarantee that rate cuts alone will be enough to prevent a recession if the trade situation deteriorates significantly.

What This Means for You and Me

So, what does all this mean for the average person? While a 35% chance of recession doesn't mean it's a certainty, it does mean that the risks have definitely increased. Here are a few things that might happen if the economy starts to slow down:

  • Job Market Could Weaken: Businesses might become more cautious about hiring, and in a recession, some companies might even have to lay off workers. This can lead to higher unemployment rates, which is tough for everyone.
  • Investments Could Take a Hit: The stock market often doesn't do well during periods of economic uncertainty or recession. If you have investments in stocks or mutual funds, you might see their value decline. Goldman Sachs themselves have even lowered their year-end target for the S&P 500 stock index, suggesting they expect more volatility and potentially lower returns.
  • Consumer Spending Might Decrease: If people are worried about their jobs or the economy in general, they tend to cut back on spending. This can create a negative feedback loop, where less spending leads to lower business revenues, which can then lead to more job cuts.

Navigating the Uncertainty Ahead

Look, nobody has a crystal ball, and it's impossible to say for sure what the future holds. But when smart people who analyze the economy for a living start raising red flags, it's a good time to pay attention and maybe think about how you can prepare.

For me, this kind of news reinforces the importance of having a solid financial foundation. That means things like:

  • Having an Emergency Fund: It's always a good idea to have some money set aside to cover unexpected expenses or a potential job loss. Aiming for three to six months' worth of living expenses is a common guideline.
  • Managing Debt Carefully: High levels of debt can become a real burden if your income is affected by an economic downturn. Now might be a good time to review your debts and see if there are ways to pay them down.
  • Thinking Long-Term About Investments: While market downturns can be scary, it's important to remember that investing is usually a long-term game. Trying to time the market is often difficult, and it's generally better to stay focused on your long-term goals.

Final Thoughts:

The fact that Goldman Sachs has raised its 12-month US recession probability to 35% is definitely something to take note of. While it's not a guarantee of a downturn, it signals that the risks have increased, largely due to the uncertainty surrounding President Trump's tariff policies. As an individual, the best thing I can do is stay informed, be mindful of my financial situation, and prepare for potential challenges. The economy is always evolving, and being ready for different scenarios is always a smart move.

Work With Norada – Secure Your Investments in 2025

With Goldman Sachs raising recession probability by 35%, now is the time to shift towards stable, cash-flowing real estate investments that provide financial security.

Norada’s turnkey rental properties offer passive income and resilience, even during economic downturns.

Speak with our expert investment counselors (No Obligation):

(800) 611-3060

Get Started Now 

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Filed Under: Economy, Stock Market Tagged With: Economic Forecast, Economy, inflation, interest rates, Recession

Tariffs Impact Housing Market: Builders Sound Alarm on Rising Costs

March 6, 2025 by Marco Santarelli

Tariffs Impact Housing Market: Builders Sound Alarm on Rising Costs

Have you ever gone to the grocery store and noticed that your favorite snacks suddenly cost a lot more? Or maybe you're thinking about buying a new TV, but the prices seem to have jumped up? These price increases, what we call inflation, can really hit our wallets hard. And lately, there's been a lot of talk about something called tariffs – taxes on goods coming into our country from other places.

Tariffs Impact Housing Market: Homebuilders Sound Alarm on Rising Costs

Dreaming of a new home? Maybe you’re picturing fresh paint, that new house smell, and finally having that extra space you’ve always wanted. But that dream might just be getting a little pricier, and here’s why: homebuilders are sounding the alarm because the cost of building materials is going up thanks to the new tariffs slapped on goods from Canada and Mexico by the Trump administration. These tariffs, intended to pressure our neighbors to tighten up border security, are having an unintended side effect right here at home – potentially making new houses more expensive for everyday folks like you and me.

Tariffs on Trade Partners Hit Home

So, what exactly happened? Well, President Trump put in place a hefty 25% tariff on goods coming in from both Canada and Mexico. This isn't just a minor tweak; it’s a significant tax on a wide range of products that cross our borders. The idea, as the White House explains it, is to push Canada and Mexico to do more to control the flow of illegal drugs and unauthorized immigration into the United States. Alongside these tariffs, there's also an additional 10% tariff on goods from China, adding another layer to this trade tension.

But here’s the rub – these tariffs hit industries that rely heavily on imports, and homebuilding is right at the top of that list. Buddy Hughes, the Chairman of the National Association of Homebuilders, put it plainly when he spoke to Realtor.com®. He warned that “this move to raise tariffs by 25% on Canadian and Mexican goods will harm housing affordability.” It's not just a vague worry; it's a direct hit to the wallet for anyone looking to buy a new home.

Think about it – when the price of lumber and other essential building materials goes up, who do you think ultimately pays? It's going to be the folks buying the houses. As Hughes pointed out, “tariffs on lumber and other building materials increase the cost of construction and discourage new development, and consumers end up paying for the tariffs in the form of higher home prices.” He's urging the Trump administration to reconsider these tariffs, emphasizing the need to keep housing affordable and to work together to boost home production.

Where Do Building Materials Come From Anyway?

You might be wondering, why are Canada and Mexico so important when it comes to building houses in the U.S.? Well, turns out, we depend on them quite a bit. Industry figures show that about 70% of the dimensional lumber used to build our homes comes from Canada. Think about the wood framing, the floors, the roofs – a lot of that starts in Canadian forests. Similarly, Mexico is a major source for drywall gypsum, that material that makes up the walls inside our houses. While China also supplies some fixtures and finishes, Canada and Mexico are the real heavy hitters when it comes to the raw materials of home construction.

This reliance on imports means that when tariffs are imposed on these countries, it’s not just a distant trade dispute – it directly impacts the cost of building a home right here in America. It’s like putting a tax directly on the materials that go into the walls and roofs over our heads.

The Ripple Effect on Home Prices

Danielle Hale, the Chief Economist at Realtor.com, paints a pretty clear picture of what this means for the housing market. According to her, builders are facing a tough choice: “Rising costs due to tariffs on imports will leave builders with few options. They can choose to pass higher costs along to consumers, which will mean higher home prices, or try to use less of these materials, which will mean smaller homes.”

Neither option is great for homebuyers. If builders pass the costs on, suddenly that dream home becomes even more out of reach for many families. Especially at a time when housing affordability is already a major concern in many parts of the country. Or, if builders try to cut costs by using less material, we could end up seeing smaller houses, maybe with fewer features, just to keep prices somewhat manageable. It’s a squeeze either way.

Hale also points out that the impact could go beyond just new homes. For a while now, the price difference between new construction and existing homes had been getting smaller in some areas. But these tariffs could reverse that trend. “The premium on new construction homes that had been shrinking in many markets according to Realtor.com data could begin to rise again, or we may see buyer's willingness to pay rise for existing homes as newly built homes get pricier—which would mean rising prices for existing homes, too,” she explains.

So, it’s not just about the price of new homes potentially going up. If new homes become more expensive, it could push up demand and prices for existing homes as well. It’s a ripple effect that could impact the entire housing market.

And it's not just buying a home that could be affected. Hale also notes that those home renovation projects we’ve been dreaming about might also get more expensive. “We may also see a lower appetite for major remodeling projects that would rely on these tariff-affected inputs, hamstringing the ability of consumers to remake their homes to fit their current needs,” she says. Want to finally redo that kitchen or bathroom? The tariffs on imported materials could make those projects cost more and potentially put them on hold for many homeowners.

Trump's Solution: More Logging

President Trump has acknowledged that we rely too much on foreign lumber. His solution? He wants to boost domestic timber production. He even signed executive orders aimed at ramping up logging in national forests. The idea is that by cutting down more trees here in the U.S., we can reduce our reliance on Canadian lumber and hopefully bring down building costs.

Now, environmental groups aren’t too thrilled about this idea, and it's understandable why. Expanding logging in national forests raises concerns about habitat loss, deforestation, and the impact on ecosystems. However, the Trump administration argues that more domestic logging is the answer to bring down building costs and lessen our dependence on Canadian lumber. It’s a complex issue with different sides and valid points.

“A Drug War, Not a Trade War”?

Adding another layer to this whole situation, a senior White House official told Realtor.com that these tariffs aren't really about trade in the long run. They are, according to this official, “a national security measure narrowly targeted at halting the international drug trade and illegal immigration, and are not intended as a long-term economic policy.” The official even suggested that the tariffs on Canada and Mexico might not last long enough to really mess with the housing supply chain, since building a house takes months anyway.

Commerce Secretary Howard Lutnick echoed this sentiment, telling CNBC on Tuesday morning, “This is not a trade war, this is a drug war.” He mentioned an April 2nd deadline for a report on trade deals, suggesting there will be discussions on how to “reset trade correctly.”

However, words are one thing, and actions are another. Canada and Mexico didn’t take these tariffs lying down. They swiftly retaliated by slapping their own tariffs on U.S. goods. This tit-for-tat tariff battle raises the specter of a full-blown trade war, which nobody really wants. Canadian Prime Minister Justin Trudeau didn't mince words, calling the tariffs “a very dumb thing to do” directly addressing President Trump. Ontario Premier Doug Ford even threatened to cut off electricity to several U.S. states, showing just how tense things are getting.

Market Jitters and Uncertainty

The financial markets aren’t exactly cheering about all this trade drama either. The S\&P 500, a key measure of stock market performance, dropped about 3.7% in the week as it became clear Trump was going ahead with these tariffs. Paul Ashworth, Chief North America Economist for Capital Economics, noted that “Markets have predictably reacted badly, since this raises the risk that Trump will also follow through on his threats to impose reciprocal country-specific tariffs soon, including a proposed 25% on imports from the EU.” The fear is that this could be just the beginning of a much wider trade conflict, impacting not just housing but the entire economy.

Remember, this all started back in February when Trump first announced these tariffs. He initially suspended them for 30 days for Canada and Mexico, hoping they would step up border enforcement. He did, however, impose a 10% tariff on China last month, bringing the total to 20% now. The focus with China is on cracking down on the production of chemicals used to make fentanyl, a deadly drug.

President Trump is expected to address Congress and the nation soon, and it’s anticipated he’ll talk about the economy and inflation. It will be interesting to see how he addresses these tariffs and the concerns about rising costs, especially in the housing market.

The Bottom Line for Homebuyers

So, where does all of this leave us? Well, it's still quite uncertain how long these tariffs will last and what the ultimate impact will be. But one thing is clear: homebuilders are worried. They’re warning that these tariffs on Canada and Mexico are likely to increase building costs, which could translate to higher prices for new homes and potentially even impact the broader housing market and home renovation projects. Whether this is a short-term blip or a more lasting shift remains to be seen. But if you're in the market for a new home, it’s definitely something to keep an eye on. The dream of homeownership might just be getting a little more expensive in the face of these trade tensions.

Navigate Economic Uncertainty with

Norada Real Estate Investments

Whether it's recession or inflation, turnkey real estate offers stability and consistent returns.

Diversify your portfolio with ready-to-rent properties designed to withstand economic fluctuations.

Speak with our expert investment counselors (No Obligation):

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Read More:

  • Will Higher Tariffs Lead to Inflation and Higher Interest Rates in 2025?
  • Will the Fed Achieve Its 2% Inflation Target in 2025: The Road Ahead
  • Are We in a Recession or Inflation: Forecast for 2025
  • Inflation's Impact on Home Prices & Mortgages: What to Expect in 2025 
  • Interest Rates vs. Inflation: Is the Fed Winning the Fight?
  • Is Fed Taming Inflation or Triggering a Housing Crisis?
  • Will Inflation Go Down Below 2% in 2025: Economic Forecast
  • How To Invest in Real Estate During a Recession?
  • Will There Be a Recession in 2025?
  • When Will This Recession End?
  • Should I Buy a House Now or Wait for Recession?

Filed Under: Economy Tagged With: 2% Inflation, Economy, Federal Reserve, inflation, interest rates, rate of inflation, Recession

Will Higher Tariffs Lead to Inflation and Higher Interest Rates in 2025?

February 27, 2025 by Marco Santarelli

Will Higher Tariffs Lead to Inflation and Higher Interest Rates in 2025?

Have you ever gone to the grocery store and noticed that your favorite snacks suddenly cost a lot more? Or maybe you're thinking about buying a new TV, but the prices seem to have jumped up? These price increases, what we call inflation, can really hit our wallets hard. And lately, there's been a lot of talk about something called tariffs – taxes on goods coming into our country from other places.

So, the big question everyone's asking is: Will higher tariffs lead to inflation and higher interest rates? The short answer is yes, very likely, higher tariffs can indeed push up prices and potentially lead to higher interest rates. Let's dive into why this happens, and what it all means for you and me.

Will Higher Tariffs Lead to Inflation and Higher Interest Rates? Let's Break it Down

Understanding Tariffs: What Are They and Why Do They Matter?

Imagine you're buying a cool toy car made in another country. To get that toy car into our stores, sometimes our government puts a tax on it – that's a tariff. Think of it like a toll you have to pay to bring something into the country. Tariffs are usually put in place to try and help businesses here at home. The idea is that by making imported goods more expensive, people will buy more stuff made in our own country. Governments might also use tariffs to make money or to put pressure on other countries. But whatever the reason, tariffs change the price of things we buy, and that’s where inflation comes in.

How Tariffs Pump Up Inflation: The Price Hike Effect

So, how exactly do higher tariffs cause prices to go up – inflation? It’s actually pretty straightforward when you break it down. There are a few main ways tariffs can lead to goods inflation, which is when the prices of things we buy in stores go up:

  • Direct Price Increase on Imports: This one's the most obvious. When a tariff is slapped on imported goods, it's like adding an extra cost right away. Companies that bring these goods into the country have to pay that tariff. Guess who ends up paying that extra cost? Yep, you and me. Businesses often pass that extra cost onto us as higher prices. For example, if there's a tariff on imported clothes, your favorite shirt from overseas is going to cost more at the store. According to a February 2025 NPR article, proposed US tariffs could lead to higher prices on all sorts of everyday items we get from places like Canada, Mexico, and China (NPR article on Trump tariffs and higher prices). It's simple math: higher tax = higher price.
  • Domestic Companies Jack Up Prices Too: It’s not just imported stuff that gets more expensive. When tariffs make imported goods pricier, companies that make similar things here can also raise their prices! Why? Because suddenly, their stuff looks cheaper compared to the imported stuff. They know people will be more likely to buy their products now that the imported competition is more expensive. It's like when the gas station across the street raises its prices – the other stations around it might raise theirs a little too. Research from the Centre for Economic Policy Research (CEPR) supports this, suggesting tariffs give domestic producers the wiggle room to increase their prices, which adds to overall inflation (CEPR tariffs and inflation). It’s a bit sneaky, but it's just how businesses work sometimes.
  • Currency Takes a Hit, Prices Go Even Higher: Here's where things get a little more complicated, but stick with me. Sometimes, when a country puts up a lot of tariffs, it can mess with how much its money is worth compared to other countries – what we call currency value. If tariffs lead to us buying less from other countries and maybe them buying less from us (that's called a trade deficit), our currency might become weaker. A weaker currency means it costs more to buy things from other countries. So, even without the tariff itself, imported goods get more expensive. It's like a double whammy! The Bank of Canada has even pointed out that tariffs can mess up supply chains and cause inflation to jump up, especially if we can't easily find things we need here at home (Bank of Canada tariffs impact). It's like everything from overseas just got more expensive across the board.

From Inflation to Interest Rates: Why Your Loans Might Cost More

Okay, so tariffs can cause inflation – prices go up. But what about interest rates? How do they fit into all of this? Well, think of interest rates as the price of borrowing money. When interest rates go up, things like car loans, home mortgages, and even credit card bills can become more expensive. And central banks, like the Federal Reserve in the US, play a big role in setting these rates.

Central banks are like the inflation firefighters of the economy. Their main job is to keep inflation under control. When inflation starts to climb too high, what do they often do? They raise interest rates. Why? Higher interest rates make it more expensive to borrow money. This means people and businesses borrow less, spend less, and save more. Less spending can cool down the economy and help bring inflation back down to a normal level.

So, if higher tariffs cause a significant jump in goods inflation, it's pretty likely that central banks will think about raising interest rates to fight that inflation. The Federal Reserve Bank of Boston, for example, estimated that some proposed tariffs could add almost a whole percentage point to inflation! That's a big jump, and it could definitely push the Fed to consider raising rates to keep things in check (Boston Fed tariffs on inflation).

But here's the tricky part: raising interest rates can also slow down the economy. It can make it harder for businesses to grow and create jobs. So, central banks are in a tough spot. They have to balance fighting inflation with keeping the economy healthy and growing. If tariffs not only cause inflation but also hurt economic growth, central banks have a really complicated decision to make. Do they raise rates to fight inflation, even if it slows down the economy more? Or do they hold off on raising rates to support growth, even if inflation stays a bit higher? Economists at CEPR point out this exact dilemma – it's a balancing act between controlling prices and keeping the economy moving forward (CEPR monetary policy response). It's not as simple as just raising rates whenever prices go up.

Real-World Examples: Tariffs in Action

To see how this all works in real life, we can look back at when the US put tariffs on steel, aluminum, and goods from China in 2018. Studies estimate that these tariffs added a bit to inflation – somewhere between 0.1 and 0.2 percentage points to what's called core inflation (that's inflation without food and energy prices, which can jump around a lot).

At that time, inflation was already around 2.2% to 2.5%. During this period, the Federal Reserve did raise interest rates several times. Now, it's hard to say exactly how much of those rate hikes were because of the tariffs, since there were other things happening in the economy too, like strong economic growth.

But it's definitely something that economists were watching closely, and it shows how tariffs can play into the inflation and interest rate picture. You can even see the inflation data from that time from the Bureau of Labor Statistics (BLS CPI data).

Looking ahead, some experts think that new tariffs being talked about, like those proposed in 2025, could push inflation even higher – maybe up to 3% or 4%! Capital Economics, for instance, suggests tariffs could really complicate things for the Federal Reserve, making it harder for them to lower interest rates in the future because of the added inflation pressure (Capital Economics inflationary impact of tariffs).

And globally, the Bank of Canada in early 2025 even cut interest rates, but warned that a tariff war could be “very damaging” and cause persistent inflation, potentially forcing them to raise rates later on (Bank of Canada rate cuts). These examples show that tariffs aren't just abstract ideas – they have real effects on prices and interest rates in the real world.

When Tariffs Might Not Cause Big Inflation Hikes (The Exceptions)

Now, it's important to remember that the economy is complicated. It’s not always a straight line from tariffs to inflation to higher interest rates. There are times when tariffs might not lead to big jumps in inflation or interest rate hikes. Here are a few situations to keep in mind:

  • If We Don't Rely Heavily on Imports: If a country makes a lot of its own stuff, and doesn't import too much of a certain product, tariffs on those imports might not cause a huge price shock. For example, if the US puts tariffs on imported steel but already makes a lot of steel domestically, the price increase might be smaller because we can just buy more American-made steel instead. CEPR's analysis points out that how much tariffs affect inflation really depends on how much a country relies on trade in the first place (CEPR tariffs and inflation). If we can easily switch to buying local, the tariff impact is less.
  • If Our Money Gets Stronger: Sometimes, other things happen in the world that can make a country's money stronger. If a country's currency becomes more valuable, it can actually offset some of the price increases from tariffs. A stronger currency makes imports cheaper, which can help keep inflation in check, even with tariffs. The Boston Fed mentioned that currency changes can be a factor when looking at the impact of tariffs on inflation (Boston Fed tariffs on inflation). So, currency strength can act as a buffer against tariff-driven inflation.
  • If Central Banks Decide Not To Raise Rates: Even if tariffs cause some inflation, central banks might choose not to raise interest rates if they think the inflation is only temporary or if the economy is already weak. Remember the Bank of Canada example? They actually cut rates even with tariff risks, because they were more worried about economic growth than inflation at that moment (Bank of Canada rate cuts). Central banks have to make tough calls, and sometimes fighting inflation isn't their top priority, especially if the economy is struggling.

Who Feels the Pinch? Sector-by-Sector Impacts

It’s also worth noting that tariffs don't affect every part of the economy equally. If tariffs are placed on a wide range of goods – like a broad-based tariff on everything coming into the country – the impact on inflation can be much bigger. The Budget Lab at Yale University estimates that a 10% tariff on all imports could raise consumer prices quite a bit, anywhere from 1.4% to a whopping 5.1%! (Yale Budget Lab tariffs). That's a significant jump that would be felt by pretty much everyone.

On the other hand, if tariffs are only put on specific goods, like just steel or just certain electronics, the impact might be more limited to those specific industries. For example, tariffs on steel might mainly affect companies that use a lot of steel, like car manufacturers or construction companies. The price of cars and buildings might go up a bit, but the price of other things might not change much. So, the breadth and scope of the tariffs really matter in determining how widespread the inflationary effects will be.

Wrapping It Up: Tariffs, Inflation, and Your Wallet

So, to bring it all together: will higher tariffs lead to inflation and higher interest rates? Based on what we know from economic research and real-world examples, the answer is likely yes. Higher tariffs can definitely contribute to goods inflation by making imported goods more expensive, giving domestic companies room to raise prices, and potentially weakening our currency, which makes imports even pricier. This inflation, in turn, can push central banks to raise interest rates as they try to keep prices under control.

However, it's not a guaranteed outcome every time. The actual effect of tariffs on inflation and interest rates depends on lots of things – how much we rely on imports, how strong our currency is, and how central banks decide to respond. But the general trend is clear: tariffs tend to push prices up, and that can have ripple effects throughout the economy, potentially making borrowing more expensive for all of us.

As someone trying to understand what's happening in the economy, I think it's crucial to see how policies like tariffs, which might seem simple on the surface, can have complex and sometimes unexpected consequences for our everyday lives. It's not just about trade numbers and economic theories – it's about the prices we pay at the store, the interest rates on our loans, and the overall health of our economy. Keeping an eye on these connections helps us all be more informed and make better decisions in our own financial lives.

Navigate Economic Uncertainty with

Norada Real Estate Investments

Whether it's recession or inflation, turnkey real estate offers stability and consistent returns.

Diversify your portfolio with ready-to-rent properties designed to withstand economic fluctuations.

Speak with our expert investment counselors (No Obligation):

(800) 611-3060

Get Started Now 

Read More:

  • Will the Fed Achieve Its 2% Inflation Target in 2025: The Road Ahead
  • Are We in a Recession or Inflation: Forecast for 2025
  • Inflation's Impact on Home Prices & Mortgages: What to Expect in 2025 
  • Interest Rates vs. Inflation: Is the Fed Winning the Fight?
  • Is Fed Taming Inflation or Triggering a Housing Crisis?
  • Will Inflation Go Down Below 2% in 2025: Economic Forecast
  • How To Invest in Real Estate During a Recession?
  • Will There Be a Recession in 2025?
  • When Will This Recession End?
  • Should I Buy a House Now or Wait for Recession?

Filed Under: Economy Tagged With: 2% Inflation, Economy, Federal Reserve, inflation, interest rates, rate of inflation, Recession

Will the Fed Achieve Its 2% Inflation Target in 2025: The Road Ahead

February 25, 2025 by Marco Santarelli

Remember back when a dollar actually felt like it could buy you something? Seems like a distant memory, right? Over the past few years, we've all felt the pinch as prices for pretty much everything – from gas in our tanks to groceries in our carts – have jumped up. The big question on everyone's mind, and especially on the minds of folks at the Federal Reserve (the folks in charge of keeping our money system healthy), is: The Road to 2% Inflation: Are We There Yet?

Well, if you're looking for a straight yes or no, here it is: not quite, but we’ve definitely come a long way. Inflation, which peaked in mid-2022, has thankfully come down quite a bit. But hitting that sweet spot of 2% inflation that the Fed aims for? That’s proving to be a bit trickier than we hoped, and recent data suggests progress might be slowing down. Let's break down what's been happening with prices and see where we actually stand on this bumpy road back to normal.

Is Fed's 2% Inflation Target Possible in 2025: The Road Ahead

The Inflation Rollercoaster: A Look Back

To really understand where we are now, we need to take a quick trip down memory lane. Let’s look at how prices have been behaving since before the pandemic hit. Thanks to the recent data and article published by the Federal Reserve Bank of St. Louis, we can get a clear picture.

Think back to the years before 2020. From 2016 to 2019, things were pretty stable. Prices were inching up at a rate of about 1.7% each year. This is based on something called the Personal Consumption Expenditures (PCE) price index. Don't let the fancy name scare you; it’s just a way of measuring how much prices are changing for all the stuff we buy as people – from haircuts to TVs.

The Fed really likes to watch this PCE number because it gives a good overall view of inflation. Their target? They want to keep inflation at 2% annually. Close to 2%, but not too much higher or lower, is considered healthy for the economy.

Now, if we look at this PCE price index chart going back to 2016, you’ll see that nice, steady climb before 2020. Then, BAM! The pandemic hits. Suddenly, things went a little haywire.

Evolution of the PCE Price Index
Image Credit: Federal Reserve Bank of St. Louis

As you can see from the chart above, in the very beginning of the pandemic, prices actually dipped below where they were expected to be if they had just kept growing at that pre-pandemic 1.7% pace. This makes sense, right? Everyone was staying home, businesses were closed, and demand for many things dropped.

But then, things flipped. Starting in late 2020 and going all the way to mid-2022, prices took off like a rocket! We saw some of the highest inflation rates in decades. Since mid-2022, thankfully, the rate of price increases has slowed down. However, and this is the key takeaway, even though inflation is slower now, prices are still going up, just not as fast.

By the end of 2024, as the data shows, overall prices were about 10% higher than they would have been if we’d just stuck to that pre-pandemic trend. Think about that – ten extra dollars for every hundred you used to spend on the same basket of goods. That’s a real bite out of our wallets.

The Inflation Peak and the Road Down (…and Maybe a Plateau?)

Let's look at another key chart that shows the rate of inflation – how quickly prices are changing from one year to the next. This is often called headline inflation.

PCE Inflation Rates and the Federal Funds Rate
Image Credit: Federal Reserve Bank of St. Louis

This second chart is really interesting because it shows both the overall inflation rate (the blue line) and the inflation rate when we take out energy prices (the green line). Energy prices, like gas and heating oil, can jump around a lot and sometimes give a misleading picture of what’s really happening with underlying inflation.

You can clearly see that sharp drop in inflation at the start of the pandemic, followed by that massive spike peaking in mid-2022. After that peak, the blue line shows inflation coming down pretty steadily. That's the good news! It means the really rapid price increases we saw are behind us.

However, if you look closely, especially at the green line (inflation excluding energy), something interesting pops out. While headline inflation (blue line) dropped quite a bit in 2024, a lot of that drop was because energy prices actually fell. If you take energy out of the picture, the green line shows that the progress in lowering inflation might have stalled a bit recently. That’s a bit concerning because it suggests that while lower gas prices are helping us feel a little relief, the underlying problem of higher prices across the board might still be stubbornly sticking around.

And look at that red line on the chart – that’s the federal funds rate. This is the interest rate that the Federal Reserve controls, and it's their main tool to fight inflation. Notice how for a long time, even as inflation was starting to rise in 2021, the Fed kept interest rates near zero? They didn't start raising rates until March 2022! In my opinion, that was a bit late. Many of us were wondering why they waited so long as prices were clearly climbing. Once they did start raising rates, though, they did it aggressively. Interest rates shot up and stayed high for a while. In late 2024, they started to bring rates down a little bit, signaling that maybe they felt they were starting to get inflation under control.

Is Inflation Just About a Few Things Going Up? Nope, It’s Broad-Based.

When inflation first started to take off, some people thought it was just because of a few specific things. Maybe it was just used cars getting expensive, or maybe it was just lumber prices going crazy. The idea was that these were temporary problems that would sort themselves out soon. This idea was often called “transitory inflation.”

But as 2021 went on, it became clear that inflation was much broader than just a few items. It wasn't just one or two things getting more expensive – it was lots of things. This is what we mean by broad-based inflation.

The Federal Reserve Bank of St. Louis provided another really helpful chart that shows this:

Estimated Distribution of Annualized PCE Inflation
Image Credit: Federal Reserve Bank of St. Louis

This chart might look a little complicated, but it’s actually quite insightful. Imagine each line in this chart as showing a snapshot of all the different things we buy in different years. The horizontal axis shows how much prices changed for each of those things, and the vertical axis shows how much of our spending goes to those items.

The orange line, representing 2016-2019, is our pre-pandemic benchmark. See how it's mostly clustered around the middle, around 0% to 5% inflation? That’s normal.

Now look at the lines for 2021 and 2022. These lines shift way over to the right. This means that in those years, a much larger share of the things we buy saw higher price increases than in the pre-pandemic years. Inflation wasn't just hitting a few categories; it was hitting almost everything.

Even in 2024, while the line has shifted back to the left a bit (good news!), it’s still significantly to the right of that pre-pandemic orange line. This tells us that even now, most of the things we buy are still experiencing higher inflation than they used to. It’s not just a few outliers anymore; it’s widespread. According to the data, about three-quarters of what we spend our money on in 2024 was still experiencing higher inflation than before the pandemic.

This broad-based nature of inflation is a key challenge. It means that getting back to 2% isn't just about fixing a few supply chain bottlenecks or waiting for one specific price to come down. It means we need to see a more general slowing of price increases across the entire economy.

Breaking It Down: Inflation by Product Category

To get even more specific, let's look at how inflation has behaved in different categories of things we buy. The Federal Reserve Bank of St. Louis provided a table that breaks this down:

Annualized Inflation Rates by Product Category Food Energy Core Goods Core Services Excluding Housing Housing All
2016-19 0.2% 4.2% -0.6% 2.2% 3.4% 1.7%
2020 3.9% -7.7% 0.1% 2.0% 2.2% 1.3%
2021 5.6% 30.6% 6.2% 5.3% 3.7% 6.2%
2022 11.1% 6.7% 3.2% 4.9% 7.7% 5.5%
2023 1.5% -2.0% 0.0% 3.4% 6.3% 2.7%
2024 1.6% -1.1% -0.1% 3.5% 4.7% 2.6%

Take a look at this table. Energy is the only major category where inflation was lower in 2024 than it was in the pre-pandemic period. This confirms what we saw in the charts – falling energy prices really helped bring down the overall inflation rate in 2024.

But look at everything else. Food prices are still rising faster than they were before. “Core goods” (things like appliances, furniture, clothes) actually saw deflation (prices going down) before the pandemic, but in 2024, they were essentially flat. “Core services excluding housing” (things like haircuts, transportation, entertainment) and “Housing” are all showing much higher inflation rates than they did before.

What this table really drives home is that inflation isn’t just an energy story. It’s impacting almost every part of our lives. Even though the overall inflation rate in 2024 was 2.6%, which is closer to the Fed’s 2% target, it's still significantly higher than the 1.7% we saw in 2016-2019. And importantly, that 2.6% is still above the Fed’s 2% goal.

So, Are We There Yet? The Verdict.

Let's circle back to our main question: The Road to 2% Inflation: Are We There Yet? Based on all this data, I think it's clear that we're not quite there yet. We've made real progress in bringing inflation down from those scary highs of 2022. Falling energy prices have been a big help. But when you dig deeper, you see that inflation is still pretty widespread across the economy, and in many key areas like housing and services, price increases are still running hotter than before the pandemic.

The Fed wants to see inflation at 2%. In 2024, we ended the year at 2.6%. That’s closer, but still a noticeable gap. And the fact that progress seems to have slowed down when you exclude energy prices is a bit worrying. It suggests that getting that last bit of inflation down to 2% might be the hardest part.

What caused this whole inflation mess in the first place? Well, that’s a whole other discussion, but the author of the data we've been looking at hints that the massive government spending during the pandemic, combined with very low interest rates from the Fed, played a big role. And with government spending still high, there might be more inflationary pressure to come.

For now, the road to 2% inflation feels like it's still under construction. We've traveled a good distance, but there might be more bumps and detours ahead before we reach our destination. We'll have to wait and see what the next set of inflation data tells us, but for now, I'm keeping a close eye on prices and hoping we can finally get back to that 2% target without too much more pain.

Navigate Economic Uncertainty with

Norada Real Estate Investments

Whether it's recession or inflation, turnkey real estate offers stability and consistent returns.

Diversify your portfolio with ready-to-rent properties designed to withstand economic fluctuations.

Speak with our expert investment counselors (No Obligation):

(800) 611-3060

Get Started Now 

Read More:

  • Are We in a Recession or Inflation: Forecast for 2025
  • Inflation's Impact on Home Prices & Mortgages: What to Expect in 2025 
  • Interest Rates vs. Inflation: Is the Fed Winning the Fight?
  • Is Fed Taming Inflation or Triggering a Housing Crisis?
  • Will Inflation Go Down Below 2% in 2025: Economic Forecast
  • How To Invest in Real Estate During a Recession?
  • Will There Be a Recession in 2025?
  • When Will This Recession End?
  • Should I Buy a House Now or Wait for Recession?

Filed Under: Economy Tagged With: 2% Inflation, Economy, Federal Reserve, inflation, interest rates, rate of inflation, Recession

Interest Rate Forecast for Next 10 Years: 2025-2035

February 18, 2025 by Marco Santarelli

Interest Rate Predictions for Next 10 Years: Expert Weigh In!

If you're looking for a quick answer, here it is: The Interest Rate Forecast for the Next 10 Years suggests a gradual decline in interest rates initially, followed by a period of stabilization and then a slow climb back up. Experts believe the Federal Reserve will begin cutting rates in 2025, aiming for a long-term target of around 2% by 2027, but rates may rise again in the early 2030s. That said, let's dig into the details, because the economic road ahead is rarely a straight line.

Interest Rate Forecast for Next 10 Years: Are Lower Rates on the Horizon?

Ever wondered how much those little numbers – interest rates – can impact your life? From the mortgage on your home to the savings account you're diligently contributing to, interest rates are the silent influencers of our financial well-being. The Federal Reserve (the Fed), the central bank of the United States, has a significant role to play in deciding the direction of the interest rates, and it's therefore crucial to stay updated with the changes. So, let's buckle up and explore the projected path of interest rates over the next decade and what it all means for you.

Where Are Interest Rates Right Now? A Quick Snapshot

As of February 2025, the Fed's target federal funds rate sits between 4.25% and 4.5%. This is a key rate because it influences what banks charge each other for overnight lending, and that, in turn, affects a whole host of other interest rates that we see every day.

Now, there's a general expectation that the Fed will start lowering rates sometime in 2025. The reason? Inflation seems to be cooling down, and economic growth isn't quite as hot as it used to be. Think of it like this: the Fed is trying to find the sweet spot where the economy is growing at a healthy pace, but prices aren't rising too quickly.

A Year-by-Year Look: Projecting Interest Rates from 2025 to 2035

Okay, time for the meat and potatoes! I've put together a table showing the projected interest rates for the next decade, along with the likelihood of the Fed cutting rates in each of those years:

Year Projected Federal Funds Rate Probability of Rate Cut (%)
2025 3.75% – 4.00% 70
2026 3.00% – 3.25% 80
2027 2.00% – 2.25% 90
2028 2.00% – 2.25% 85
2029 2.25% – 2.50% 60
2030 2.50% – 2.75% 55
2031 2.75% – 3.00% 50
2032 3.00% – 3.25% 45
2033 3.25% – 3.50% 40
2034 3.50% – 4.00% 30
2035 4.00% – 4.25% 20

Let's break down what this table is telling us:

  • 2025: We're likely to see the start of rate cuts, bringing the federal funds rate down a bit. This is the Fed reacting to inflation cooling off.
  • 2026: The cuts continue, potentially bringing the rate down further. The Fed is probably trying to encourage more economic activity.
  • 2027: The Fed might be close to its long-term target for interest rates. This is the level where they believe the economy can grow steadily without inflation getting out of hand.
  • 2028-2029: A period of stability might be on the horizon. The Fed could take a “wait and see” approach to assess the impact of the earlier rate cuts. It is also possible that a slight upward movement may begin as growth pressures emerge.
  • 2030-2031: The forecasts indicate a gradual upward adjustment. As the economic expansion gains traction, the federal funds rate could edge higher.
  • 2032-2033: To combat potential inflation or overheating of the economy, the Fed may increase interest rates again.
  • 2034-2035: As the economy matures, projections suggest rates could stabilize closer to historical norms. The probability of cuts is reduced.

Keep in mind: These are just projections! The future is never set in stone. There are many factors that could change these numbers.

A Decade of Change: How Fed Interest Rates Evolved (2014-2024)

The decade from 2014 to 2023 witnessed a dynamic shift in Federal Reserve (Fed) interest rate policy, moving away from the unprecedented low rates implemented in the wake of the 2008 financial crisis. Here's a detailed overview:

  • 2014-2015: Tapering and Initial Hike: This period signified the end of the zero-interest-rate policy (ZIRP) era. After years of maintaining near-zero rates to support the economic recovery, the Fed began signaling its intention to normalize monetary policy. In December 2015, the Fed cautiously initiated its rate-hiking cycle, raising the target federal funds rate from a range of 0% to 0.25% to a range of 0.25% to 0.50%. This move reflected growing confidence in the strength of the labor market and the overall economy.
  • 2016-2018: Gradual Normalization: The Fed continued its gradual approach to raising interest rates throughout this period, implementing measured increases at several Federal Open Market Committee (FOMC) meetings. By December 2018, the target range had reached 2.25% to 2.50%. These increases were driven by sustained economic growth, a declining unemployment rate, and the Fed's efforts to manage inflation and prevent the economy from overheating.
  • 2019: A Pivot to Accommodation: As economic growth slowed and global uncertainties increased, the Fed adopted a more dovish stance in 2019. After multiple rate hikes in prior years, the central bank paused its tightening cycle and subsequently lowered interest rates three times during the year. By year-end, the target range had been reduced to 1.50% to 1.75%. The Fed cited concerns about global economic developments, trade tensions, and muted inflation as reasons for its policy shift.
  • 2020-2023: Crisis Response and Extended Accommodation: The onset of the COVID-19 pandemic in early 2020 triggered a sharp economic contraction. In response, the Fed aggressively slashed interest rates back to near zero (0% to 0.25%) to cushion the economic blow, support financial markets, and encourage borrowing and investment. This ultra-low rate environment persisted for several years as the Fed focused on fostering a strong and inclusive recovery. In 2022 and 2023, the Fed aggressively raised rates to combat rising inflation.

The Crystal Ball: What Influences Interest Rate Decisions?

So, what makes the Fed tick? What factors do they consider when deciding whether to raise, lower, or hold steady on interest rates? Here are a few of the big ones:

  • Inflation: This is the big kahuna. If prices are rising too quickly, the Fed will often raise interest rates to slow things down. They want to keep inflation around 2%.
  • Economic Growth: The Fed also wants the economy to grow at a healthy pace. If growth is too slow, they might lower rates to encourage borrowing and spending.
  • Labor Market Conditions: A strong job market with lots of hiring and rising wages can put upward pressure on inflation. The Fed will keep a close eye on unemployment rates, job growth, and wage trends.
  • Global Economic Factors: The world is interconnected. What happens in other countries can affect the U.S. economy. Geopolitical instability, trade wars, or economic slowdowns in major economies can all influence the Fed's decisions.
  • Financial Stability: The Fed also wants to make sure the financial system is stable. Big market crashes or banking crises can prompt them to lower rates to provide support.

My Two Cents: Some Personal Thoughts on the Road Ahead

Now, I'm not an economist with a fancy degree. But I've been following the economy for a while, and here are a few of my personal thoughts on what might happen:

  • Inflation Will Be Key: I think whether the Fed can successfully bring inflation down to its 2% target will be the biggest driver of interest rate decisions over the next few years. If inflation proves stubborn, we could see interest rates stay higher for longer than expected.
  • The Global Economy is a Wildcard: There's a lot of uncertainty in the world right now, from geopolitical tensions to potential trade disruptions. These factors could easily throw a wrench into the Fed's plans.
  • Don't Expect a Quick Return to “Normal”: After a period of historically low interest rates, I think it's unlikely that we'll see rates return to those levels anytime soon. The economy has changed, and the Fed's approach may need to change with it.

What Does This Mean for You?

Okay, enough with the economic jargon! Let's talk about how these potential interest rate changes could affect your life:

  • Mortgages: Lower interest rates mean lower mortgage payments. If you're thinking about buying a home or refinancing your existing mortgage, keep an eye on interest rate trends.
  • Savings Accounts: Higher interest rates on savings accounts are good news for savers. You'll earn more money on your deposits.
  • Loans: Interest rates on car loans, personal loans, and credit cards are also affected by the Fed's decisions. Lower rates can make it cheaper to borrow money.
  • Investments: Interest rates can also influence the stock market and other investments. Lower rates can sometimes boost stock prices, while higher rates can have the opposite effect.

Staying Informed: Resources for Further Reading

If you want to dig deeper into this topic, here are a few resources I recommend:

  • CBO Budget and Economic Outlook
  • Federal Reserve Economic Projections

These websites provide a wealth of information on the economy and the Fed's policies.

The Bottom Line

The Interest Rate Forecast for the Next 10 Years points towards a period of gradual adjustments as the Fed tries to navigate the complex economic landscape. It's not a simple situation, but understanding the key factors and following the trends can help you make smarter financial decisions.

Remember, I'm just a regular person sharing my thoughts. This is not financial advice. Always do your own research and consult with a qualified financial advisor before making any major decisions.

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Inflation’s Impact on Home Prices & Mortgages: What to Expect in 2025

January 28, 2025 by Marco Santarelli

The Impact of Inflation on Home Prices and Mortgage Rates

So, you're thinking about buying a house, or maybe you're just curious about what's going on in the real estate world? Well, it’s a complicated picture right now, and a big part of that has to do with inflation. The simple answer is that inflation generally pushes both home prices and mortgage rates higher, making it more expensive to buy a home. But the story is more nuanced than that, and I'm going to break it down for you, using my own experience and observations to really make sense of what's happening. Let's get into it.

Inflation's Impact on Home Prices & Mortgages: What to Expect in 2025

Current Economic Climate: What's Going on With Inflation?

It feels like we’ve been talking about inflation forever, right? Well, as of January 2025, the rate is sitting around 3.0% year-over-year. That’s better than the peak we saw back in 2022 when it was a painful 6.8%, but it’s still pretty noticeable in our day-to-day lives. You might have noticed that even though the inflation numbers have come down, the cost of things – groceries, gas, you name it – is still up from where it used to be.

The Federal Reserve has been working hard to bring inflation under control. They've been using their tools, like adjusting interest rates and buying bonds, to try and put the brakes on rising prices. This impacts the entire economy, and one of the biggest effects we’ve seen has been on the housing market.

Mortgage Rate Rollercoaster: High Rates Despite Lower Inflation

Here’s where it gets a little confusing. You'd think that with inflation cooling down, mortgage rates would be falling, right? Well, not quite. In late January 2025, the average 30-year fixed mortgage rate is hovering around 7.04%, down slightly from 7.11% just a few days prior. Now, that’s a significant jump from the rates we saw just a few years ago. We need to consider more than just inflation in understanding mortgage rate dynamics. For instance, investor sentiments, and federal policy changes all affect mortgage rates.

I remember when I bought my first home, and mortgage rates were quite low, around 3.5% or 4%. Looking at today's rates makes me realize how much more difficult it is for first-time homebuyers. It's tough out there. The relationship between inflation and mortgage rates is not as straightforward as one might think. In the table below, you'll see that while inflation came down significantly in 2023 and continues to do so, mortgage rates did not follow the same path.

Period Inflation Rate (%) 30-Year Fixed Mortgage Rate (%)
2022 6.3 5.8
2023 4.9 6.5
January 2025 3.0 7.04

Understanding the Dance Between Inflation and Mortgage Rates

So, why aren't mortgage rates coming down as much as inflation is? Well, it's a bit like a dance. Here’s how it works:

  • Federal Reserve Moves: The Federal Reserve, as I mentioned, plays a big role. When they raise interest rates to fight inflation, it ripples through the economy, including the mortgage market.
  • Investor Confidence: Investors who buy mortgage-backed securities are always watching economic indicators. If they think the economy is going to be volatile, or that inflation might spike again, they tend to demand higher returns, which pushes up mortgage rates.
  • Overall Economic Health: Things like job growth, consumer confidence, and even global events can impact investor sentiment. These factors affect the mortgage-backed securities market, which ultimately influences mortgage rates. It is a complex equation with a lot of variables.

Inflation's Impact on Home Prices: Supply and Demand

Now, let's talk about home prices. Inflation has a direct impact here as well. When the cost of construction, labor, and materials go up due to inflation, it translates to higher prices for new homes. This additional cost is often passed on to buyers, which pushes up overall home prices. Here’s what’s happening:

  • Price Growth Continues: Even with inflation cooling, home prices have continued to climb in many areas. As of January 2025, home prices are about 5.3% higher than the previous year. That's a solid increase, despite the high mortgage rates. This signals that buyer demand is still robust.
  • Low Inventory Woes: The housing supply has remained low for a while now. When there aren't enough homes on the market, this increases competition among buyers and drives prices up. I have personally seen this in my own neighborhood, where it seems every house that goes on the market gets snapped up almost immediately.

Regional Differences: A Market of Many Stories

It’s also important to remember that the housing market isn’t the same everywhere. Different areas respond differently to inflation and economic changes:

  • West Coast Hot Spots: Places like California have seen really steep increases in home prices over the past few years. However, there are signs that prices in some areas may start to correct if rates remain high. It is hard to buy in these markets now.
  • Southern States Boom: On the other hand, states like Florida and Texas are experiencing steady growth, mostly due to growing populations and booming job markets. My friends in Texas have seen their home values increase dramatically in just a couple of years.

It's always a good idea to look at your specific area to really understand what's going on in your local market. It’s not just a national trend.

Buyer Behavior: Are People Hesitating to Buy?

All these factors have led to some shifts in buyer behavior.

  • Buyer Caution: Many people are holding off on buying homes because of high mortgage rates. They’re afraid that rates will stay high, making homes unaffordable. It can be scary to make such a large purchase when you don't know what tomorrow will bring.
  • Rentals on the Rise: With homeownership becoming harder, demand for rental properties has gone up. This, in turn, pushes rental prices higher and further strains household budgets. It’s a vicious cycle.

Looking Ahead: What Can We Expect in 2025?

So, what might we expect as we move further into 2025? Here's what I’m watching:

  • Price Stabilization: If mortgage rates stop climbing, we might see home prices in some markets start to level off or even drop slightly. This could create more opportunities for buyers who have been waiting on the sidelines. I am personally hoping for some stability in the market.
  • Rental Market Pressures: The current situation is going to continue to fuel demand for rentals. This means that rent prices are likely to keep rising, making it harder for people to save for a down payment. We may even see an increased demand for multi-family housing solutions.
  • Economic Shift Impact: If inflation continues to slow down, the Federal Reserve might change its policies and reduce long-term interest rates. This could have a positive effect on mortgage rates and give the housing market a much-needed boost. This is an area I’m watching closely.

Wrapping it Up: Staying Informed is Key

The relationship between inflation, home prices, and mortgage rates is complicated, but understanding it is crucial for anyone buying, selling, or investing in real estate. In my experience, keeping up with these economic factors helps you make smarter choices.

Whether you’re a first-time homebuyer, a current homeowner, or an investor, knowledge is your best tool. It’s a good time to be cautious and informed. I am personally making sure to not jump into any rash decisions regarding my personal investments, and instead am relying on data and my own intuition.

Remember, the housing market is dynamic. Stay informed, adapt your plans, and take advantage of any opportunities that come your way.

Invest Smarter with Norada in 2025

As inflation affects home prices and mortgages, secure consistent returns with turnkey real estate investments.

Protect your portfolio against inflation by diversifying into high-quality, ready-to-rent properties.

Speak with our expert investment counselors (No Obligation):

(800) 611-3060

Get Started Now 

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Filed Under: Economy, Housing Market, Real Estate Market Tagged With: Economy, Housing Market, inflation, mortgage

Interest Rates vs. Inflation: Is the Fed Winning the Fight?

January 19, 2025 by Marco Santarelli

Interest Rates vs. Inflation: Is the Fed Winning the Fight? Predictions

The question on everyone's mind lately is whether the Federal Reserve's strategy of raising interest rates is actually working to tame inflation, and the short answer is that it’s complicated, but currently, it's not quite a clear win. While they have made progress, the battle isn't over yet.

We're seeing some stubborn inflation sticking around, and the Fed's challenge now lies in continuing to cool prices down without slamming the brakes too hard on the economy. It's a tightrope walk, and understanding the dynamics at play is crucial for all of us.

I remember the early 2020s when inflation started to creep up after all that pandemic chaos, and it felt like every week, prices were jumping. I couldn't understand why my groceries were costing so much more, and I definitely wasn't alone. Now, we're trying to figure out how the Fed is trying to fix this and what it all means for us. Let's dive into the details.

Interest Rates vs. Inflation: Is the Fed Winning the Fight?

The Fed's Inflation Target: Why 2 Percent?

First things first, let's talk about the Fed's target of 2% inflation. It might seem arbitrary, but there’s a good reason behind it. It’s the benchmark that helps the economy run smoothly. A little bit of inflation is normal and even healthy – it encourages people to spend rather than hoard their money.

But too much inflation messes with planning: businesses can’t set prices properly, and consumers are less willing to spend if they’re worried about prices rising sharply.

When inflation is stable at a low level, people and businesses can make informed decisions about saving, borrowing, and investing, which promotes steady economic growth. This target is not unique to the U.S.; many central banks around the world use a similar target, including those in Canada, Australia, and Japan.

The thing is, keeping inflation at exactly 2% is like trying to nail a bullseye with a bow and arrow. It's incredibly difficult, and the real world is rarely this neat. Sometimes it's above, sometimes it's below, and there's a lot that can affect those shifts. The current situation is a perfect example.

As of November 2024, the inflation rate in the US was at 2.7%, and while that might seem like a small difference, that 0.3% jump from the previous month shows how volatile things can be. Many economists believe inflation is going to stay above 2.5% for most of 2025, and that is putting a lot of pressure on the Fed.

There’s a real risk with prolonged periods of low inflation too. It can lead to a downward spiral where people start expecting lower prices, which can depress economic activity.

That's why the Fed has sometimes suggested they might allow for inflation slightly above 2% after periods of low inflation, to give the economy a boost. This change shows they’re trying to be flexible and react to the real-world conditions, rather than blindly sticking to a target in all situations.

How Interest Rates Are Used to Fight Inflation

The main weapon the Fed uses to combat inflation is adjusting interest rates, specifically the federal funds rate. They've currently set it at between 4.25% and 4.50%. I know it sounds dry and technical, but understanding this is really important. Here's how it works, in simple terms:

  • Raising Interest Rates: When the Fed raises interest rates, it makes it more expensive for banks to borrow money. Banks then pass those costs on to consumers and businesses, which means higher rates for loans, mortgages, and credit cards. This tends to slow down the economy because people and businesses are less likely to borrow and spend money. Less demand means prices eventually cool down. This is how they try to control inflation.
  • Lowering Interest Rates: On the flip side, when the Fed lowers interest rates, it makes borrowing cheaper, encouraging people and businesses to take out loans and spend more. This increases demand and helps the economy grow.

It's a balancing act, though, because if you raise rates too much, the economy might slow down too much and could even slip into a recession. It's a very delicate situation that the Fed is in, and I think they realize the importance of fine-tuning these adjustments.

The relationship between interest rates and inflation isn't immediate and it's far from perfect. It's like trying to steer a ship – you turn the wheel, but it takes time for the ship to change course.

There are other economic factors at play too, so it's not simply a one-to-one relationship. Currently, with inflation staying high and above the 2% goal for 2025, this puts a lot of pressure on the Fed to stay the course with its rate policies, even with the risk of slower economic growth.

Is the 2% Target Always the Right Choice?

Now, let’s take a step back and question that 2% target itself. Is it always the best choice? This is something economists and policymakers debate all the time. Some experts argue that it might be beneficial to aim for a slightly higher target, maybe even around 3%. Here’s why they think so:

  • More Flexibility: A higher target would give the Fed more wiggle room to lower interest rates during economic downturns without hitting the zero bound (where interest rates can’t go any lower). This can be very helpful to stimulate the economy during recessions.
  • Accommodating Growth: A higher target could also accommodate higher economic growth more comfortably. Sometimes, the economy grows so fast that inflation picks up, but if the target is too low, the Fed has to intervene more aggressively, which can slow things down.
  • Avoiding Deflation: A bit of inflation is better than deflation, which is where prices fall, and that can be really bad for the economy. If you’re waiting for prices to fall further, you’re less likely to spend money which causes the economy to shrink.

However, others believe that sticking to the 2% goal is crucial for keeping things stable. They believe it provides businesses and individuals with the certainty they need to plan ahead and make sound financial decisions. The problem is that changing the target after it has been set is challenging, as it can confuse and destabilize markets.

There is also the Fed's new more flexible inflation strategy, where it tries to achieve an average of 2% over the long run. I think this makes a lot of sense as it acknowledges that we live in a dynamic world, and that sometimes you need some leeway to respond to economic changes.

Beyond Just Raising Rates: What Else Could the Fed Do?

Let's be honest: Raising interest rates is not a perfect solution. If done too aggressively, it can lead to job losses and even a recession. So, what else could the Fed do besides relying solely on rate hikes? Here are some alternatives that I think are worth considering:

  • Targeted Measures: Instead of broad interest rate changes, the Fed could target specific sectors contributing the most to inflation, like housing or energy. For example, they could adjust the reserve requirements for banks providing loans in those sectors. This would help to cool down those sectors without impacting the broader economy as much.
  • Fiscal Policy Coordination: Sometimes, monetary policy (what the Fed does) and fiscal policy (what the government does) need to work together. The Fed could collaborate with the government on policies to provide targeted relief to those that need it most. I believe that a combined approach is often more effective, especially in complex situations. This might involve tax breaks or direct spending on essential goods and services to help keep prices lower for lower-income households.
  • Better Communication: I believe that one of the most effective, yet often overlooked tools, is for the Fed to better communicate its policies to the public. This could help to better set expectations and influence how consumers and businesses make spending and investment decisions. By being more transparent and clearly outlining its goals, it can help influence behavior and can help anchor inflation expectations.

My Thoughts on the Fed's Current Situation

As someone who has seen the ups and downs of the economy and followed all this closely, I believe the Fed is in a tough spot. On one hand, they need to get inflation under control, and on the other hand, they can't risk stalling the economy completely. It is like walking on a tightrope and a single wrong step can cost you.

The current interest rates at 4.25% to 4.50% are a reflection of that balancing act. I understand they are trying to cool down the economy enough to lower inflation, without triggering a recession. It's a tough needle to thread.

I think the Fed's decision-making meetings are going to be crucial for the coming months. They will need to carefully monitor the economy and be prepared to adapt quickly to the shifting economic realities. The rest of the world will be watching closely too, because the Fed's decisions will have an impact far beyond the US. I also believe that it is in our best interests as consumers, business owners and investors to stay informed and understand how these policies can affect our personal and business finances.

Conclusion: Are We There Yet?

So, going back to our original question: Is the Fed winning the fight against inflation? The short answer is no, not definitively yet. They have made progress, and the rate hikes have had some effect, but inflation is still above their target. It's not a race, it's a long slog, and there are still more rounds to go. The Fed is going to need to continue to monitor the economy, adjust its policies, and be prepared for changes along the way. This is not an easy fight, but I believe that they are on the right path. We all need to be patient and vigilant because it affects us all.

Here’s a quick summary of the situation:

Aspect Details
Fed Target Rate 4.25% to 4.50%
Inflation Target 2%
Current Inflation Rate 2.7% (as of Nov 2024)
Predicted Inflation Above 2.5% for most of 2025
Main Tool Adjusting the federal funds rate
Alternatives Targeted measures, fiscal policy coordination, better communication

Read More:

  • More Predictions Point Towards Higher for Longer Interest Rates
  • Interest Rate Predictions for Next 2 Years: Expert Forecast
  • Interest Rates Predictions for 5 Years: Where Are Rates Headed?
  • Mortgage Rate Predictions for Next 5 Years
  • Mortgage Rate Predictions for the Next 2 Years
  • Surprise Job Growth Throws Interest Rate Predictions into Disarray

Filed Under: Economy Tagged With: Fed, inflation, interest rates

Mortgage Rates Are Predicted to Rise if Fed Slows Rate Cuts in 2025

January 13, 2025 by Marco Santarelli

Mortgage Rates Are Predicted to Rise if Fed Slows Rate Cuts in 2025

The Federal Reserve’s monetary policy has long been a cornerstone of the U.S. economy, influencing everything from credit card rates to mortgage costs. As we move into 2025, the Fed’s decision to slow the pace of interest rate cuts is sending ripples through the housing market, with mortgage rates predicted to rise.

Federal Reserve Chair Jerome Powell addressed the economic outlook at a Dallas event on November 14, 2024, where he outlined the Fed's cautious approach to potential interest rate cuts. This shift marks a significant departure from earlier expectations and could have profound implications for homebuyers, refinancers, and the broader economy.

Mortgage Rates Are Predicted to Rise if Fed Slows Rate Cuts in 2025

Key Takeaways

  • Fed Rate Cuts: The Federal Reserve plans to implement only two rate cuts in 2025, a significant reduction from previous expectations.
  • Mortgage Rate Trends: The average rate for a 30-year fixed mortgage could remain to levels above 6%, affecting affordability for buyers.
  • Economic Factors: Persistent inflation and potential government policy changes, particularly under the Trump administration, may exacerbate future rate rises.
  • Impact on Homebuyers: Increases in mortgage rates mean higher monthly payments, reducing what many families can afford.
  • Refinancing Challenges: Opportunities for securing lower rates are dwindling, making refinancing less attractive for many homeowners.

The Fed’s Shift in Rate Cut Expectations

The Federal Reserve's actions have a substantial bearing on the overall economic environment in the United States. In 2024, the Fed enacted three consecutive rate cuts, cumulatively reducing the federal funds rate by one percentage point. These cuts were initially viewed as necessary responses to counterbalance cooling inflation and to stimulate economic recovery by making borrowing cheaper (PBS).

However, as we enter 2025, the Fed's outlook appears to have shifted. With current projections indicating only two rate cuts for the year, economists are beginning to reassess the potential impact on markets. This cautious stance reflects the Fed's recognition of prevailing inflationary pressures that could put upward pressure on prices, complicating its monetary policy strategy.

Understanding the Fed's Monetary Policy

Monetary policy refers to the actions undertaken by a central bank to control the money supply and achieve specific economic goals, such as controlling inflation, maximizing employment, and stabilizing prices. The Fed’s decisions on interest rates play a pivotal role in influencing overall economic activity, and any shift in this policy can have widespread ramifications.

The Fed utilizes a tool known as the federal funds rate, which is the interest rate at which banks lend reserve balances to other depository institutions overnight. Changes to this rate impact borrowing costs across the economy, influencing everything from credit card bills to home mortgages. Yet, the connection between the federal funds rate and mortgage interest rates is not always straightforward.

Why Mortgage Rates Are Rising Despite Fed Cuts

The relationship between the Fed's interest rate cuts and rising mortgage rates can seem contradictory to many. Generally, when the Fed lowers rates, borrowing costs should decrease, leading to lower mortgage rates. However, mortgage rates predominantly rely on long-term bond yields, especially the 10-year Treasury notes, which are subject to different economic forces than the federal funds rate.

Over the last few months, we have observed significant increases in 10-year Treasury yields. In January 2025, the average 30-year fixed mortgage rate had climbed from 6.08% in September 2024 to nearly 7% (ABC News). This trend is largely due to market reactions to shifts in economic outlook and inflation expectations, signaling that consumers may face higher borrowing costs even amidst Fed rate cuts.

This rising yield is reflective of market concerns related to inflation. An increase in treasury yields can indicate that investors expect inflation to rise, which can lead to higher interest rates on long-term loans, including mortgages.

The Role of Inflation and Economic Uncertainty

Inflation is a key economic metric that reflects the rate at which the general level of prices for goods and services is rising, eroding purchasing power. The Federal Reserve aims to maintain a target inflation rate of 2%. Currently, inflation rates hover around 2.8%, which is still above the Fed's ideal target. Despite a marked reduction in inflation levels from the highs seen in 2022, the persistence of elevated inflation has caused concern among policymakers.

In the context of the incoming Trump administration, potential shifts in fiscal policy can further complicate this landscape. Policies such as increased tariffs and tax reforms could contribute to inflation by raising consumer prices and altering market dynamics for various sectors. Heightened tariffs, for example, may raise costs for imported goods, which can translate into higher prices for consumers. Such factors bolster the Fed's rationale for maintaining a cautious approach to rate cuts, as any significant easing might trigger a resurgence in inflationary pressures (Fannie Mae).

Implications for Homebuyers and Refinancers

As mortgage rates begin to rise amidst this economic backdrop, the implications for homebuyers are significant. The cost of borrowing directly impacts affordability. For instance, a 30-year fixed mortgage at a 7% interest rate on a $400,000 home would lead to a monthly payment of approximately $2,660. A similar mortgage at 6% would see monthly payments closer to $2,400—a difference that can accumulate to tens of thousands of dollars over the loan's lifespan (HousingWire).

This rising trend in mortgage rates can lead to a cooling of home buying activity. Potential buyers may find it more difficult to qualify for loans or may have to settle for less expensive homes. As rates ascend, the affordability of homes declines, potentially dampening enthusiasm in the housing market, which had previously seen a surge of activity during lower-rate environments.

For homeowners looking to refinance, the rising rates present additional challenges. As the Fed signals a slowing of rate cuts, many borrowers may find that the window for securing lower rates is narrowing. Homeowners who hoped to take advantage of historically low rates will need to evaluate their options carefully, as the allure of a refinancing journey becomes less attractive with each uptick in rates.

What Lies Ahead for 2025?

Looking ahead to 2025, various factors will likely influence the trajectory of mortgage rates. Market sentiment concerning inflation, anticipated government policies, and the Fed's prevailing stance on interest rates will serve as primary drivers of rate volatility. While some economic forecasts suggest that there may be limited declines in rates later in the year, the broader consensus indicates that rates will likely remain elevated compared to what we saw in the years leading up to the pandemic (CBS News).

The Fed's current trajectory thus reflects a careful balance of extending support for economic growth while managing the risk of inflation. Analysts will be watching closely how the Fed responds to incoming economic data, which can alter rate expectations dramatically. Any significant economic shifts could lead to rapid changes in the housing market, as both buyers and lenders adapt to evolving conditions.

In addition to monetary policy, overall consumer confidence and economic stability will play a role. If inflation remains elevated, consumers may have reduced confidence in purchasing decisions, potentially stalling housing activity further. The interconnectedness between monetary policy and consumer behavior underscores how pivotal 2025 could be for the mortgage market.

Conclusion

The Federal Reserve's decision to slow the pace of rate cuts in 2025 is fundamentally reshaping the mortgage landscape. As rising mortgage rates pose challenges to prospective homebuyers and current homeowners alike, understanding these dynamics becomes essential. Amid uncertain economic conditions and shifting policies, remaining informed will be paramount for anyone looking to navigate the complexities of an evolving mortgage environment.

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Filed Under: Financing, Mortgage Tagged With: economic policy, Federal Reserve, inflation, mortgage, Mortgage Forecast, mortgage rates

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