Will the Fed ruin the lowest mortgage rates of 2025?

Happy lowest-mortgage-rate-of-the-year day on this Halloween week! Mortgage rates are currently at a yearly low right before the Fed meets so the question is: will Fed Chair Jerome Powell ruin the good news right before Halloween festivities?

Whatever Powell says tomorrow, mortgage rates are behaving differently than they did last year at this time. Last year, mortgage rates were rising above 7% and the 10-year yield had already risen 73 basis points from its low. Neither of those two things are happening now. Let’s look at why.

Why are mortgage rates near 6%?

The big question in 2025 has been who would win the war with the bond market: those who believed rates had to go higher due to inflation, deficits, treasury supply and a host of other reasons? Or, would it be the camp that said the bond market will weigh softer labor data the way it has in the past few years, no matter where the inflation growth rate was? Well, looking at the 10-year yield chart below we can see who won that battle.

As I write this article, the 10-year yield stands at 3.99%. Last year at this time, it was at 4.35%, while mortgage rates were at 7%. This year’s mortgage pricing is significantly better — but why? The key factor is that mortgage spreads have improved in 2025. In fact, if any of you see a mortgage spread on Halloween, give them a hug and give them an extra treat as they are the unsung hero for housing this year.

If we were experiencing the same mortgage spreads as in 2023, mortgage rates would be above 7% today. Fortunately, that is not the case, nor should it be, as mortgage spreads typically improve during this phase of the economic cycle.

Without the labor data getting softer and mortgage spreads improving as they should have, we wouldn’t be near 6% today — or even below 6% for those homebuyers who go with ARM loans, as short-term rates have driven those rates lower too.

Conclusion

We have a Fed meeting tomorrow, and traditionally, Fed Chair Powell tends to get quite irritable during these press events. With bond yields under 4% and inflation 1% above the target, he often uses this opportunity to adopt a more hawkish stance.

However, the labor data is much softer now than in 2024 and the bond market has already done much of the Fed’s heavy lifting by lowering yields, which in turn has brought down mortgage rates. Who knows, maybe Powell will surprise us and take the victory lap that the market and the economy offer him.