In testimony to the House Financial Services Committee today, Federal Reserve Chair Jerome Powell said they haven’t cut rates this year because of the tariffs.
And if there wasn’t the looming threat of inflation due to the tariffs, the data would say to keep cutting, as the Fed did in 2024.
They cut the fed funds rate three times last year, including a 50-basis point cut in September, followed by a 25-bp cut in both November and December.
Then they stopped cutting as President Trump came into office and shortly after announced sweeping global tariffs.
Many expect those tariffs to result in some level of inflation, which makes it difficult for the Fed to continue cutting. That could also be why mortgage rates are having a tough time coming down too.
The Tariffs Are Expected to Be Inflationary, One Way or Another
While there’s been plenty of debate about tariffs since the start of the year, most expect them to be inflationary.
And if you to speak to anyone who operates a small business, which relies to some extent on imports, they’ll tell you prices are going to rise.
It’s pretty straightforward. If it costs companies more money to bring products into the United States, the price must go up for consumers.
But the importer won’t foot the entire bill, nor will the retailer, or the consumer for that matter.
It’ll be split up to some degree to lessen the blow, but even with a friendly arrangement of cost splitting, it still results in higher prices, aka inflation.
The big question is how bad it’ll be.
Powell said, “The effects on inflation could be short lived—reflecting a one-time shift in the price level. It is also possible that the inflationary effects could instead be more persistent.”
In other words, it could be “transitory” or it could be lasting inflation, the latter of which would be an issue for the Fed.
Either way, it means the Fed can’t keep cutting because they don’t yet know how it will affect consumer prices.
In response to a question from one of the lawmakers about it being appropriate to cut again now, Powell again brought up the tariffs.
“If you just look at the basic data and don’t look at the forecast, you would say that we would’ve continued cutting. The difference, of course, is at this time all forecasters are expecting pretty soon that some significant inflation will show up from tariffs. And we can’t just ignore that.”
Would Mortgage Rates Be Lower without the Tariffs Too?
So what about mortgage rates. Would they be lower if not for the tariffs?
The answer is most likely yes, despite the Fed not setting consumer mortgage rates. The Fed merely adjusts short-term rates via its fed funds rate.
However, their overall policy stance typically has a direction, e.g. cutting or hiking, and if they’re cutting, chances are bond yields are coming down too.
It’s not a direct correlation, like the prime rate, which dictates HELOC rates and goes up or down whenever the Fed hikes or cuts.
But if there’s the expectation the Fed is going to continue cutting, and such cutting is warranted by economic data (and outlook), bond yields could well front run those cuts.
This is basically what happened in 2024 when mortgage rates fell to nearly 6% in September, before rising after the Fed cut.
My logic was the cuts were baked in (since mortgage rates came down from as high as 8%), so it was a little bit of sell the news.
And a hot jobs report surfaced shortly after too, followed by Trump winning the election.
All those events led to higher mortgage rates post-Fed rate cut.
But assuming those tariffs (and trade war) never happened, we could have had a lower 30-year fixed mortgage rate today.
And perhaps more importantly, could have had a lower 30-year fixed rate for all of the key spring home buying season.
Instead, mortgage rates rose above 7% several times, likely causing a lot of would-be home buyers to put their property search on hold.
The general uncertainty of the tariffs and trade war may have also led to lower home sales volume as well, even if it wasn’t technically unaffordable to buy with mortgage rates at 7% versus say 6.5%.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.