While the Fed gets all the attention, here are the other factors to keep an eye on regarding future mortgage rates
The Federal Reserve has been in the spotlight for most of 2025, as its decision to hold the federal funds rate steady has brought about ire and frustration from the Trump administration and some brokers and economists.
For many consumers, and even some newer brokers, there is a perception building that the central bank’s rate decisions have a direct correlation to mortgage rate changes.
Selma Hepp (pictured top), chief economist at Cotality, said it is important to understand that the Fed’s decisions are just one factor in a large and sometimes complicated equation.
“It’s been all about what the Fed is going to do, but one really telling sign of how much less relevant the Fed is is what happened in the Fall of last year,” Hepp told Mortgage Professional America. “The Fed dropped the federal funds rate, but then mortgage rates went up because we had elections, which could lead to long fiscal difficulties and deeper debt.
“That has really had a bigger impact on mortgage rates than what the Fed has done alone. So yes, there’s a lot more to it than just the Fed.”
Treasury rates
One area for brokers and consumers to keep an eye on is the 10-year Treasury rate. Since the most recent Fed meeting, the 10-year has slipped from just over 4.38% to just under 4.20% at close on Monday.
“The big thing right now overall about mortgage rates is the price of the 10-year Treasury,” Hepp said. “When you think about the 10-year Treasuries, what impacts it is fiscal policy. So it’s things like economic growth, inflation, federal budget deficit, Fed independence, but also assurance that the federal government is going to pay its debt.”
One of the factors that may have impacted Treasury rates was the jobs report released Friday, which showed a reduction in previously reported jobs numbers. Hepp said economists are keeping a close eye on data like that as a potential early sign of overall economic struggles.
“What are the expectations for economic activity going forward?” she asked. “We had a bit of a disappointing jobs report on Friday. And while that does impact the Fed, it also impacts expectations of what happens with economic growth, like the potential for a recession. We saw inverted yields as a result. That has a huge impact first on the 10-year Treasuries, and ultimately on mortgage rates.”
Debt is another factor
Another concern for the market is increasing debt, especially in the wake of the passage of the President’s budget bill. The nonpartisan Congressional Budget Office said the new law will add $3.4 trillion to the US national debt over the next decade. The administration disputed those numbers.
“As a result of the slowing economy, you have the Federal Reserve pulling back,” Hepp said. “Then, there are still expectations of elevated long-term federal government debt because of the policies that have been put in place. That’s something that matters to that primary spread, because the investors in mortgage-backed securities look at the probability that everything is going to get paid on time.”
Not only could the Federal Government be dealing with more debt, but people are dealing with more consumer debt than ever before. If those people start falling behind on mortgages, especially government-backed ones, that could put more strain on the national debt.
“You have a bit of a credit risk concern,” she said. “If we do have a recession, there is a fear that you have a higher share of your borrowers losing their jobs, then you have to provide guarantee for the borrower. So, servicers have to come up with the payments. If there’s a potential for recession, you have to account for a higher probability of defaults. Then, who pays for the default?
“The likelier the probability of recession, the likelier it gets priced into a higher spread as well.”
A combination of a weak jobs report and a key Federal Reserve resignation has made a September rate cut "almost certain."https://t.co/uCHQW3owaG
— Mortgage Professional America Magazine (@MPAMagazineUS) August 4, 2025
One piece of good news for those looking for lower rates is that Hepp believes that if there are no other outside forces or additional shocks to the system, a rate cut could lead to lower mortgage rates. Right now, the markets are betting that the Fed will resume cutting rates in September.
“There is no upcoming election or new legislation that is going to be passed now that the big, beautiful bill is passed,” Hepp said. “We already have that understanding of what the potential impacts are, and I think that’s already being priced in. Absent any other shocks, a rate cut could be helpful.”
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