In the just-released FOMC statement, the Fed announced a 0.25% cut to the Fed funds rate. This lowers the Fed funds range to 3.50% to 3.75% and is the third consecutive cut of this “meeting-by-meeting” regime. This was broadly expected by the market.
Today’s meeting comes with a refresh of dot plot projections. The market is mindful that those are subject to the same lack of official BLS data from the government shutdown period that the markets out here in the wild have been dealing with. Outside of changes to the policy statement and a dot plot change, the “news” today will come from Chair Powell’s press conference. That said, Powell is moving into his lame duck status now that the end of his Chairmanship term is approaching. The point of this is that today’s events won’t really provide much clarity for the future path of rates in 2026.
There will be a focus on the average 2026 dot plot for Fed funds today. Since the June update, it’s been at 3.375%, which projects one rate cut in all of 2026. Expectations that a more dovish FOMC in 2026 could deliver two cuts could result in this average dropping below 3.375% as soon as today. Likewise, if the current inflation hawks prevail and the average dot plot rises above 3.375%, it will take even one rate cut in 2026 off the table — in terms of the FOMC projection, that is. Watch for changes to the forward guidance in the statement to back up any dot plot change.
What the market expects has been more dovish, more cuts, all along. A market reaction to either of these directional outcomes could result in an increase in volatility (remember, volatility refers to bigger rate movements over a short time period, typically measured in 15 days). Even if the average stays at 3.375% today, the catch-up period for BLS data will keep upward pressure on the 10-year yield until and unless a convincing mix of lower inflation or worse job market data comes to pass.
Powell may face specific questions about the opposing mandates for inflation and employment, but his ability to drive market reaction is fading as the end of his term approaches. That’s not to say volatility couldn’t increase, making short-term mortgage originations more challenging, just that the data and other events will become more influential factors.
What’s Next?
Recently, the jobs market has given some signals of stabilizing, even recovering a touch. If that continues, more focus will be paid to the inflation front — and it helps explain the recent rise in term Treasury yields and fixed-rate mortgage rates. Fresh BLS data from December and onward will drive market reactions affecting mortgage rate sheets, even with a more dovish Fed Chair waiting in the wings. The first FOMC meeting of 2026 will conclude on January 28. And the Federal government’s continuing resolution expires on January 30. There’s still a lot of economic clarity that markets and the Fed itself are looking for.
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 by the end of 2026, the current mortgage rate market remains exposed to greater-than-typical levels of uncertainty within the typical rate lock period. Inflation remains the wild card.
Certain local markets have seen declines in housing values, but as rates move down, that dynamic will change. And despite increases in available inventory, relative to the longer-term need for housing, there remains a shortage of homes for years to come. The math on making a home purchase sooner rather than waiting for expected lower rates favors the earlier purchase and opportunity to begin building equity.
A borrower isn’t looking to purchase a market trend or an inventory level. They are looking for a home that will meet their needs now and far into the future. After finding a home for purchase and getting an accepted offer, the best course of action is to secure financing quickly to avoid possible market volatility that could upend those plans.
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