Fed rate cut raises questions about next moves on mortgage rates

The Federal Reserve on Wednesday cut its benchmark rate by a quarter-point, its first move in more than a year, and projected it would trim rates two more times this year as concerns about the U.S. job market persist. The move comes as mortgage rates have moved in fits and starts in recent weeks, prompting questions about whether further declines are ahead for home loans.

Mortgage rates have generally trended lower since late July on expectations of the Fed easing. The average rate on a 30-year fixed mortgage was 6.35% last week, the lowest in almost a year, according to Freddie Mac. By comparison, a year ago a similar pullback preceded the Fed’s first rate cut in more than four years, with the average dropping to 6.08% one week after that cut. But rates did not stay at those levels; they rose again in the months that followed, climbing to just over 7% by mid-January. As the Fed has signaled potential for additional cuts this year, some observers caution that rates may not continue to slide in a straight line.

Like last year, the Fed’s rate cut does not guarantee continued declines in mortgage rates. Rates could come down further, given the Fed’s potential for two more rate cuts this year, but inflation risks remain a key factor that could reverse any downward trend if consumer prices rise unexpectedly. Inflation heated up in August, and if the September inflation report shows another uptick, some analysts fear rates could move higher again."

Mortgage rates are influenced by several forces, from the Fed's policy decisions to bond market expectations for the economy and inflation. Mortgages generally move with the 10-year Treasury yield, which lenders use as a guide to pricing home loans. When the 10-year yield rises, mortgage rates tend to follow, and when it falls, rates may ease. The yield has cooled since mid-summer amid signs that the job market is softening, fueling expectations of further policy easing.

Ahead of the decision, traders had priced in expectations that the Fed would cut its key rate at upcoming meetings and possibly into 2026, but the central bank’s latest projections showed a more modest path than some market participants anticipated. Danielle Hale, chief economist at Realtor.com, cautioned that investors are weighing not only today’s move but the Fed’s outlook for growth, the labor market, and inflation over the next year or so. She said the trajectory of rates will depend on how those factors evolve rather than on today’s cut alone.

Stephen Kates, a financial analyst at Bankrate, noted that lower rates do not guarantee ongoing declines in mortgage costs. They could trend down further, especially if the Fed continues to cut, but they may not move in lockstep with policy decisions. Market participants have been watching the Fed’s projections for clues about how quickly rates might fall and how soon inflation might ease.

The late-summer pullback in mortgage rates has buoyed the housing market, which has been sluggish since 2022 when rates began their climb from historic lows. Home-price growth remains substantial in many markets, with national values up roughly 50% since the start of the decade, even as sales of existing homes have cooled to levels not seen in decades. The housing market logjam persists, and analysts say a sustained relief would require both additional rate declines and slower price growth, or even outright declines, to improve affordability for many buyers.

If mortgage rates do ease further, buyers could gain more purchasing power, but a larger pool of buyers could also intensify competition and push prices higher in some markets. For shoppers who can afford to buy now, the recommendation is to prioritize fit and financing over trying to time the market.

Mortgage refinancing activity has picked up as rates softened, with applications rising in recent weeks. A common rule of thumb for refinancing is to aim for a rate drop of at least one percentage point to offset closing costs, a threshold that not all borrowers may achieve depending on their current loan terms and loan-to-value ratio.

Overall, analysts say the path of mortgage rates remains uncertain. While the Fed’s rate cut signals a potential easing cycle, mortgage pricing will continue to hinge on inflation data, labor-market signals, and how bond markets interpret the Fed’s long-run policy stance. Buyers and homeowners alike should monitor upcoming inflation and employment reports and consider locking in rates when a favorable window appears, rather than assuming that a single rate cut will automatically push rates lower for an extended period.