“The market is still expecting 1-2 cuts toward the end of 2025,” Zhao said. “However, the more tariff policy volatility there is, the more likely it is that there are fewer or no cuts. The reason is that the more tariff policy changes, the more likely it is that, in the Fed’s view, inflation expectations become “unanchored”. Meaning that rather than a one-time price increase, consumers start expecting that there are a series of price increases.
“That can become a self-fulfilling prophecy that keeps inflation higher for longer. A one-time inflation increase can be ignored by the Fed, but a prolonged increase is one that they would need to address through more restrictive monetary policy, like higher rates.”
Zhao said that while a decrease in the interest rate could help the housing market, high rates are not the only factor causing issues. She believes the Fed has to keep the entire economic picture in mind when considering a rate move to avoid long-term problems.
“A drop in rates would certainly spur housing market activity,” she said. “However, the housing market has some deeper issues related to a shortage of housing units. At the end of the day, the prevailing rate has to make sense in the context of broader economic growth, inflation, and labor market activity. Artificially low rates will only create greater problems down the road.”
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