Why Interest Rates
Rise and Fall

We want to share some insights about interest rates—how they change and what might happen. This should help explain why rates have been high recently and what could lead to them dropping.


Why Interest Rates Rise and Fall

The Federal Reserve (the Fed) controls interest rates in the U.S. When the economy gets too hot and prices rise quickly (high inflation), the Fed raises interest rates to cool things down. This makes borrowing money more expensive, so people and businesses spend less, which helps lower inflation.

From early 2022 to mid-2023, the Fed significantly increased interest rates (from near zero to around 5.25%-5.50%) to combat high inflation. This was the most significant hike in 40 years! As a result, borrowing costs for things like mortgages also went up. For example, the average 30-year mortgage rate rose from 3.0% in 2021 to 7.2% in 2024.


What Needs to Happen for Interest Rates to Drop

Interest rates can drop when inflation is controlled, and the economy slows down. Here’s what we expect:

Lower Inflation
We think inflation will decrease below the Fed’s 2% target by 2025 and 2026. This means prices won’t rise as quickly, so the Fed can start lowering interest rates.

Economic Slowdown
A slower economy with higher unemployment (above 4%) will likely push the Fed to cut rates to stimulate growth.


Looking Ahead

If inflation falls and the economy slows, the Fed will likely lower rates to make borrowing cheaper and boost spending. This should help the economy grow without causing another spike in inflation. By 2026, we hope to see lower interest rates to help make homeowners’ monthly payments affordable.

Interest rates fluctuate, and they’re only one piece of the puzzle when it comes to buying a home. The key is to buy a home when you’re financially ready and when it makes sense for you and your family to make a move. Connect with one of our Loan Officers and we can take a look at your unique situation and help craft the best plan for you.

Subject to credit approval, not all borrowers may qualify. All information is for educational and illustrative purposes only. Not a commitment to lend, and not financial advice. Not affiliated with or endorsed by any government institution. Please contact us for eligibility and quotes. Source: https://fred.stlouisfed.org/series/MORTGAGE30US

Check out our insights on how interest rates change