Mortgage Rates to Hold Steady After Inflation Eased More Than Expected in February

March 12, 2025 by Chen Zhao

Inflation in February came in lower than expected, but the monthly report is less promising under the hood. With the added impact of extensive new tariffs looming in April, mortgage rates are unlikely to fall.

Core prices were 0.23% higher in February than in January, slightly lower than expectations of a 0.28% increase, but the miss was driven by a large drop in airline fares. Airfares declined 4% from a month ago. Importantly, for bond market investors trying to predict future Fed cuts, this category does not carry over from today’s CPI inflation report over to the PCE inflation report, the Fed’s preferred gauge of inflation that does not come out until the end of the month. Tomorrow’s report on producer prices, the PPI, will provide the airfare data (along with a few other key data points) that flows through to the PCE report. It is possible that, for the first time in a very long time, the PCE report will show higher inflation than the CPI report.

For the Fed and the bond market investors that determine mortgage rates, the inflationary impact of looming tariffs is top of mind. An additional 25% tariff on steel and aluminum imports went into effect today. This is on top of extensive new tariffs on China and a volatile and escalating trade war with Mexico and Canada, our most important trading partners. And even more expansive tariffs may go into effect on April 2, including reciprocal tariffs on all trading partners. The economic impact of all of this has yet to be felt, much less be reflected in the data. The Fed and bond investors are trying to decipher how much inflation will go up, how long it will stick around, and how much of a hit economic growth will take. With so much uncertainty, the Fed is likely to hold rates steady for the near term and investors will continue to price that expectation.

Mortgage rates are mostly being driven by trade policy at the moment. Until there is more clarity on the end game for tariffs, home buyers are unlikely to see mortgage rates come down significantly.

Chen Zhao

Chen Zhao leads the economics team at Redfin, where she produces research on the housing market for public and internal audiences. Previously, she was an executive director leading housing finance and financial markets research at the JPMorgan Chase Institute. Prior to joining JPMCI, Chen was an economics consultant at Analysis Group, Inc., where she worked on financial litigation cases and led teams conducting health economics and outcomes research on behalf of pharmaceutical companies. While in graduate school, Chen was with the Center for Economic Studies and the Social Economic and Housing Statistics Division at the US Census Bureau, where she conducted applied microeconomics research using large scale restricted-access linked survey-administrative data. She started her career at the White House Council of Economic Advisers, where she focused on labor and health economics.