The Federal Reserve (the Fed) met last week, and expectations were high that they would cut the Federal Funds Rate (which, of course, they did). But does that mean mortgage rates will drop? Let’s clear up the confusion.
The Fed Doesn’t Directly Set Mortgage Rates
When it comes to mortgage interest rates, all eyes tend to be on the Fed. Most economists expected they would cut the Federal Funds Rate at their mid-September meeting last week to try to head off a potential recession.
Ahead of the meeting, according to the CME FedWatch Tool, markets were already betting on the rate cut believing there was virtually a 100% chance of a September cut. And forecasters believed there was about a 92% chance it would be a small cut (25 basis points) and an 8% chance it will be a bigger cut (50 basis points):
This was borne out by the 7-member Board of Governors of the Federal Reserve as only one member voted for a 50-basis point cut.
So, what exactly is the Federal Funds Rate? It’s the short-term interest rate banks charge each other. It impacts borrowing costs across the economy, but it’s not the same thing as mortgage rates. Still, the Fed’s actions can shape the direction mortgage rates take next.
Why Markets Already Saw This Cut Coming
Here’s the part that may surprise you. Mortgage rates tend to respond to what the financial markets think the Fed will do, before the Fed officially acts. Basically, when markets anticipate a Fed cut, that outlook gets priced into mortgage rates ahead of time.
That’s exactly what happened after weaker-than-expected jobs reports on August 1 and again with the September 5 jobs reports. Each time, mortgage rates ticked down as financial markets grew more confident a cut was coming soon. And even though inflation rose slightly in the latest CPI report, the Fed was still expected to make a cut.
So, as we saw, the Fed went with a 25-basis point cut, as expected, and the mortgage rates essentially had the cut already baked in to current mortgage rates, and we did not see much, if any, reduction in mortgage rates last week.
Had they dropped their Federal Funds Rate by 50 basis points instead, mortgage rates likely would have come down more than they already have.
So, Where Do Mortgage Rates Go from Here?
While last week’s cut did not move the needle much, many experts expect the Fed could cut the Federal Funds Rate more than once before the end of the year. Of course, that’s if the economy continues to cool (see graph below):
As Sam Williamson, Senior Economist at First American, explains:
“For mortgage rates, investor confidence in a forthcoming rate-cutting cycle could help push borrowing costs lower in the back half of 2025, offering some relief to housing affordability and potentially helping to boost buyer demand and overall market activity.”
If multiple rate cuts happen, or even if markets just believe they will, mortgage rates could ease further in the months ahead. But here’s the catch – all of this depends on how the economy evolves. Surprise inflation data or unexpected shifts in other economic forecasts could quickly change the outlook. The remaining 2025 Board of Governors meetings are October 28-29 and December 10. So keep an eye on various economic reports that are issued weekly/monthy (inflation, jobs, unemployment, home sales and more). Or, get in touch with us for an update!
Bottom Line
Mortgage rates likely won’t drop sharply overnight, and they won’t mirror the Fed’s moves one-for-one. But if the Fed begins a rate-cutting cycle, and markets continue to expect it, mortgage rates could trend lower later this year and into 2026. That’s good news for both buyers and sellers! Buyers could see lower rates resulting in lower monthly payments and sellers could see increased interest in their home.
If you’ve been waiting and watching the housing market, now’s the time to talk strategy. Even small changes in rates can make a meaningful difference in affordability, and understanding what’s ahead helps you make the best decision for your situation. If you have questions, feel free to contact us!
Real Estate | Your@HomeTeam 