Fed Stands Pat and Weekly Mortgage Rates Inch Higher

Mortgage rates remained stalled a little under 7% this week. Meanwhile, the Federal Reserve left short-term interest rates unchanged today as the central bank waits to find out how higher tariffs will affect the economy.

The average rate on a 30-year fixed-rate mortgage rose six basis points to 6.93% in the week ending May 7, according to rates provided to NerdWallet by Zillow. A basis point is one one-hundredth of a percentage point.

Uncertainty looms over the economy, and mortgage rates don't have a clear direction to go. The 30-year mortgage hasn't moved much in the last month. In that time it has perched above 6.7%, occasionally fluttering over 7% for two or three days before landing a little lower.

Fed leaves short-term rates alone

Economic uncertainty hangs over the Federal Reserve, too. After its May 6-7 meeting, the central bank left its target for the federal funds rate unchanged. The rate, which banks charge each other for overnight loans, remains in a range of 4.25% to 4.5%. The federal funds rate doesn't directly affect mortgage rates, but it indirectly influences them by setting a floor for overall interest rates.

"Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace," the Fed said in its statement.

The Fed increases the federal funds rate when inflation is high, and it decreases the federal funds rate when unemployment is high. It raised rates in response to the post-COVID surge in prices. Then, as inflation subsided in 2024, the central bank cut rates. Still, the Fed considers the federal funds rate to be "restrictive" or in "tightening" mode — that is, the central bank is keeping the rate high enough to slow economic growth. That, in turn, is designed to pull inflation lower.

But the inflation rate has been stuck above the Fed's target of 2% for years. Now higher tariffs have been imposed, which may increase prices. At the same time, fewer shipments are on their way from China, which could result in a decline in employment among stevedores, truckers, warehouse workers and delivery drivers. An economic slowdown could ripple outward.

The Fed faces a choice — eventually

If prices rise while the economy slows, the Fed would have to choose which medicine to dispense. Raise rates to combat inflation? Cut rates to stimulate the economy? In such a case, the central bank will decide which malady — inflation or unemployment — has pushed the economy farther from the Fed's goal, Fed Chair Jerome Powell said after the March 19 meeting.

"Then we’ll ask how long we think it might take to get back to the goal for each of them, and we’ll make a judgment, because our tools work in one direction," Powell said. "We’re either tightening or loosening."

Here's a complication: From the Fed's perspective, higher tariffs aren't inflationary when they're a one-and-done deal. If prices jump once to accommodate tariffs, but don't keep rising, then the Fed might be able to cut rates sooner.

In this uncertain environment, Powell said after the March meeting, "I think there is a level of inertia where you just say, 'Maybe I’ll stay where I am.'" That's what the Fed did at this meeting by leaving the federal funds rate unchanged.

How all this affects home buyers

The uncertainty extends to mortgage rates. Mortgage rates won't be affected by the Fed's decision to stand by, said Rob Cook, chief marketing officer for Discover Home Loans. "There are other factors that will influence the direction of home loan rates in the coming weeks, particularly economic data that provides insights into inflation and whether the economy will slow down further or rebound," he said via email.

The advice for today's home buyers: Keep an eye on news of inflation and layoffs as you decide when to lock your mortgage rate. With a rate lock, the lender guarantees the interest rate if the loan is closed by a certain date — even if rates rise in the interim. On the other side of the coin, that's the rate you'll pay if rates fall in the same interval.