Will the turmoil force the Fed to hold rates?
Geopolitical turmoil, both at home and abroad, was a major news story in 2025, and it has only increased in scope in the new year.
Internationally, Venezuela and Greenland have been in the headlines, and now Iran appears to be moving to the forefront of the world’s attention.
Domestically, ICE raids in Minnesota have dominated the news cycle. In addition, there is friction between the US and some of its biggest allies over trade issues.
Beyond the direct effects of this turmoil, brokers will want to know how it could affect the mortgage market. Could the Federal Reserve, sensing international uncertainty, put a hold on future rate cuts?
Sam Williamson (pictured top), senior economist at First American, said markets can experience short-term impacts from turmoil. In the long term, mortgage rates tend to return to their normal ties to the domestic jobs market and inflation.
“Geopolitical shocks can trigger bouts of heightened financial volatility and policy uncertainty that can move mortgage rates more than the Fed in the short run,” Williamson told Mortgage Professional America. “Those shocks can trigger a flight to safety in US assets, pushing Treasury yields down and mortgage rates by extension.
“Alternatively, they can push rates higher if markets price more inflation risk or demand a larger risk premium for uncertainty. These effects, though, are often sharp but short-lived. As conditions stabilize, mortgage rates typically re-anchor to inflation, growth, and the Fed’s policy outlook.”
Volatility often reactionary, short-lived
Many market moves, driven by domestic and international turmoil, are volatile. Williamson believes they are often short-lived. He encourages brokers to stick to fundamentals when judging the market, and believes that traditional market movers will usually win out in the long run.
“While geopolitical risks may make day-to-day swings more likely, these moves are often reactionary and can reverse as markets reassess the underlying fundamentals,” Williamson said. “For brokers, the focus should be on the drivers that typically reassert themselves once markets absorb new information, especially the trajectory of inflation, the direction of longer-term rates, and whether mortgage rate spreads are widening or compressing.
“Over time, these factors will play a larger role in shaping the rate environment than any single event.”
The topic of geopolitical risk was raised during Jerome Powell’s press conference on Wednesday. He said the largest impacts from the risk typically show up in the oil market, and so far, prices there have gone down.
“Geopolitical risk for us is a lot of it is around energy and oil,” Powell said. “For all the turmoil, oil prices have come down, as you know, so we don't really see much.”
The secondary impacts internationally surround trade. Tariffs have been one of the biggest stories of the last year. However, Powell believes the US market has withstood the new tariffs well because they have ended up smaller than originally expected, and the US has largely avoided imposing large counter-tariffs.
“Longer than that, it is trade,” Powell said. “Our economy has pulled through pretty well, you have to say, given the very significant changes in trade policy. The US economy has pushed right through, partly (because) what was implemented was significantly less than what was announced at the beginning.
“Other countries didn't retaliate. In addition, a good part of it hasn't been passed through to consumers yet. It is being taken by companies that stand between the consumer and the exporter. So, that is where that is.”
What it means for rates
The impact of an influx of new Venezuelan oil on the market and its potential to reduce inflation could be a major story for the Federal Reserve in 2026. Powell said yesterday that both sides of the mandate, while still in tension, are in a better place now than in late 2025.
If inflation continues to decline as tariffs pass through and more oil enters the market, it could give the Fed the green light to lower rates further. Selma Hepp, chief economist at Cotality, told Mortgage Professional America that the oil issue could be counterbalancing the potential negative effects of geopolitical uncertainty.
“Usually in times of this geopolitical uncertainty, you have this risk premium that gets built into the spreads,” Hepp said. “At the same time, also potentially a fear of inflation, reinflation, or inflation from higher oil prices. But my reading is that it's a more disinflationary impact of the Venezuelan crisis, because it opens up more supply.”
If that trend continues, Hepp believes that despite yesterday’s rate hold, the Fed will lower rates further in 2026 in addition to the three cuts it made at the end of 2025.
“How does it ultimately impact the mortgage rates?” Hepp said. “I think it's going to be more about the impact on the labor markets in the US. Do we really continue to see this softening of the labor markets, which gives the Fed ammunition to lower rates, versus their fears that there's going to be some reinflation down the road? In my opinion, the job market is going to dominate. And I think that will drive their decisions coming up further in 2026.”
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