In the just-released FOMC statement, the Fed announced a 0.25% cut to the Fed funds rate. This re-starts the rate cut campaign after six consecutive meetings on hold. This lowers the Fed funds range to 4.00% to 4.25%.
The administration has put public pressure on Chair Powell to cut the Fed funds rate by a larger amount, and has taken actions creating unique circumstances in the history of the Fed. The markets will try to decipher those actions in addition to the policy statement, fresh dot plots, and Powell press conference. With Cook remaining in the mix and the addition of Miran, today’s focus on policy moves is twofold.
First, what are the fresh dot plots telling markets about future rate cut projections? Is there consensus to cut by 75 basis points (bps) over the last two 2025 meetings, or only by 50bps? Secondly, what do dissents to today’s policy decision imply for future rate cuts, and about the independence of the Fed?
A more aggressive 2025 dot plot projecting the need to cut 75bps before the end of the year (vs. 50bps) will result in term rates falling further today. Watch for a sub 4.00% yield on the 10-year as a quick benchmark reference. If the dot plot projections are a more orderly 50bps for 2025 and incremental cuts into early 2026, then term rates may rise a bit.
Watch for Powell to signal whether the Fed is viewing today’s action as the beginning of a cycle of cuts to bring the neutral rate of Fed funds back into focus (thought to be 3.0%). Or if it is only a first step to reduce the restrictive level of Fed funds. The latter case will create the greatest possibility for term rates to move back higher.
The political influence of the situation with Cook and Miran is contributing to the thought that a 25bps cut today is justified by current inflation and employment data. The forward guidance from the statement, dissents, and the dot plots will drive the level of reaction in markets.
A lot more could be said about the situation the Fed finds itself in today, and Powell in particular. But since events are happening quickly, the best course of action is to digest as much of this as possible in real time.
What’s Next?
Today’s dot plot revisions will inform the market on possible October and December rate cuts as well as the path in 2026 towards the neutral rate. That will influence the level of term rates (mortgage rates) going forward.
While the tariff war has by and large run its course, with the notable exception of China, its impact on inflation is not fully known. This will keep the “data dependency” mantra by the Fed alive and injecting risk into markets.
The jobs market is slowing, but the unemployment rate is still historically low. Continuing slowing will force the Fed to keep rate cuts coming and will keep bringing term rates down with it. If any signal of a recession emerges, term rates will drop faster than currently projected.
What Do Borrowers Do Now?
Originators should explain to borrowers looking to finance the purchase of a home that even as term rates are expected to fall, the current mortgage rate market remains exposed to greater-than-typical levels of uncertainty within the typical rate lock period. To name the greatest risk to falling rates, inflation measures remain the wild card, with the impact of tariffs still working its way into consumer pricing.
Certain local markets have seen declines in value, but once rates start back down, that dynamic will change. And despite increases in available inventory, relative to the longer-term need for housing, there will remain a shortage of homes for years to come.
A borrower isn’t looking to purchase a market trend or an inventory level. At a point in time, they are looking for a home that will meet their needs now and far into the future. After finding a home for purchase and achieving an accepted offer, the best course of action is to secure financing quickly to avoid possible market volatility that could upend those plans.
Visit our Market & Industry page for more industry updates.
