Fed Slashes Rates, But Don’t Hold Your Breath for Big Mortgage Drops

The Federal Reserve recently enacted another interest rate reduction, but homebuyers shouldn't expect a quick drop in mortgage rates as a result.

On Wednesday, as anticipated, the Fed lowered its benchmark policy rate by 0.25 percentage points, bringing it to a new range of 4.25% to 4.5%. This marks a significant decrease from the recent peak of 5.25% to 5.5%, where rates had remained stable for over a year before the Fed began cutting in September.

Despite the Fed’s decision aligning with investor expectations, it won’t have an immediate or dramatic impact on mortgage rates. The long-term bond markets, which set the rates for home loans, had already factored in this expected cut.

As a result, the Fed’s move is unlikely to substantially shift mortgage rates. For the week ending December 12, 30-year fixed mortgage rates averaged 6.6%, following three consecutive weeks of declines, according to Freddie Mac.

However, the outlook for mortgage rates remains somewhat concerning. Along with the rate cut, the Fed’s updated projections suggested a more cautious approach to future rate adjustments. Policymakers forecast only two more quarter-point reductions by 2025, down from the four cuts projected in September.

Moreover, the rate cut decision wasn’t unanimous. This highlights a split among Fed officials about whether the current pace of rate reductions might be too aggressive. These signals suggest that mortgage rates could edge higher in the coming weeks, though any increase is expected to be modest.

“I don’t expect to see a huge reaction from mortgage rates to this news because the market had largely already priced these expectations in,” explains Danielle Hale, Chief Economist at Realtor.com®. “In short, the Fed’s current stance mirrors where the market had already moved.”

Looking ahead, the Realtor.com® economic research team predicts that mortgage rates will likely remain above 6% throughout 2025, with a gradual decline to approximately 6.2% by the end of next year.

Fed Takes a Cautious Stance Going Forward

The Federal Reserve adjusts its policy rates based on its dual mandate: to maintain maximum employment and to keep inflation around 2%. To tackle inflation, the Fed raises rates, while cutting rates helps stimulate economic growth and the labor market.

At his post-meeting press conference, Fed Chair Jerome Powell emphasized that the central bank is now balancing risks on both sides of its mandate. He noted that the Fed would proceed carefully with future rate cuts to avoid reigniting inflation.

“With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” Powell explained. “We can therefore be more cautious as we consider further adjustments to our policy rate.”

Powell expressed confidence in the broader economy, citing strong labor market conditions, robust consumer spending, and steady GDP growth. However, he acknowledged ongoing weakness in the housing market, which has been weighed down by high mortgage rates and home prices.

“Housing activity is very low, and that’s probably significantly because of our policy,” Powell said.

Upcoming data is expected to show that home sales in 2024 could hit a 30-year low, with many potential buyers sidelined due to affordability issues.

Hope for Housing Market Recovery in 2025

Despite these challenges, there are signs of improvement in the housing market. In recent months, more homes have come onto the market, and an increasing number of listings have seen price reductions.

Danielle Hale offers a more optimistic outlook for the housing market in 2025: “A solid economic backdrop in the year ahead is expected to underpin the 2025 housing market, ushering in a bump in home sales and modest deceleration in home prices.”

However, Hale also points out that the market will still have its challenges. “Buying a home still takes a larger share of your paycheck today than in recent history,” she adds. But there is hope on the horizon. “Income growth in 2025 is expected to reverse that trend, and if homebuilders ramp up production, as expected, we will start to close the gap on the housing shortage that has long been a thorn in the side of homebuyers, especially first-time homebuyers.”

In summary, while the Fed’s interest rate cut may not immediately lower mortgage rates, the housing market could see gradual improvement as income growth and increased homebuilding efforts help ease affordability pressures. Still, challenges remain, and buyers should remain cautious in the near term.

Watch the entire conference here.