Fed Rate Decision October 2025: Impact on Mortgages

The Federal Reserve cut its benchmark rate by another 25 basis points on Wednesday amid a divided committee. The widely anticipated move was aimed at supporting a weakening labor market in spite of rising inflation. Governor Stephen Miran dissented in favor of a 50 basis point cut; Kansas City Fed President Jeffrey Schmid dissented in favor of no move. Mortgage rates, which had already priced in an October cut, may trend down if expectations increase for a third rate cut in December.  

That said, Fed chair Jerome Powell took a cautionary tone:

“We continue to face two-sided risks. In the Committee's discussions at this meeting, there were strongly differing views about how to proceed in December. A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it.”

The target range for the federal funds rate is 3.75% - 4.00%. It was the second time the Fed cut the benchmark rate this year. 

What Wednesday’s rate cut means for mortgages

If expectations of a third cut in December increase, we could see mortgage rates trend down a few tenths of a percentage point leading up to that meeting. But the market's reaction to Powell's post-meeting comments indicate less confidence in that outcome, which could send rates up.

Impact on home buyers

Home buyers may be in for a surprise if expecting a much lower rate environment. Today’s current mortgage rates are about on par with their lows of the year — previously reached September 16. And, if history repeats itself, we could see rates rise slightly before they head down again. That’s based on the rate trajectory of 30- and 15-year fixed rate mortgages since the last rate cut was announced, and largely depends on anticipation of a third cut.

Mortgage rates track long-term Treasury yields more than the federal funds rate itself. Homebuyers should watch the 10-year Treasury yield and lender rates over the next few days as markets digest today’s rate decision and Powell’s comments. The 10-year Treasury yield was near 4.08% Wednesday after the press conference. While still near year-lows, it climbed 0.07 points since the rate announcement.

Impact on refinancing

Refinancing activity has increased sharply off of already-low rates. Given Wednesday’s rate decision, now could be a good time to lock in a lower rate — especially if you’re in an ARM (adjustable rate mortgage) that has adjusted to a variable rate, or if you’re in a fixed rate over 7.0%.  

Refinancing is a tool to manage long-term risk and hedge against further volatility. Though one or more future cuts are possible, they're not guaranteed. If inflation remains above 3% or the labor market rebounds, we could see rates stall or even rise from their current long-term lows.

Economic factors that influence the Fed's decision

Cutting interest rates may seem like a no-brainer when you think of how much you might save on borrowing costs. But it’s not that simple. The Fed considers a slew of factors, the most significant are typically:

• Inflation: Whether core inflation is moving toward or away from the Fed’s 2% target.
• Labor market strength, weakness, and resiliency: Employment levels, wage growth, and signs of cooling or overheating are taken into account.
• Economic growth: GDP, consumer spending, and business investment that signal momentum or an economic slowdown.
• Financial and global risks: Market stability, tariffs, geopolitical tensions, and credit conditions that could threaten the economic outlook.

Though the Fed has historically kept politics at arm’s length, pressure is mounting. A failed attempt to fire governor Lisa Cook, the installation of the administration’s top economic adviser to a vacant seat, and early moves to announce a new Fed chair all highlight a growing challenge to the institution’s independence.

Fed rate cuts: Benefits and risks

Benefits

Lower interest rates generally spur borrowing activity. A robust credit market not only makes it easier for you to refinance your mortgage, buy a new home, or borrow money in general, but it also makes it easier for businesses to do so. In turn, businesses have lower borrowing costs, which can free up funds to hire additional employees. In other words, lower interest rates can reduce unemployment and potentially increase salaries — all seemingly good things and why the Fed chose to cut rates this month.

Risks

As a result of more people having more disposable income, the cost of goods can also increase, a.k.a. inflation. When inflation rises, it makes it harder to afford basic necessities, like food or a roof over your head — especially if the cost of necessities rises faster than your salary.

The current housing affordability crisis is one example of this. Record-low mortgage rates during the pandemic (low borrowing costs, see above) plus a work-from-home revolution contributed to one of the fastest-growing housing markets ever. The index for shelter inflation increased from under 2.5% to over 7.5% between March 2021 and March 2023. It’s currently at 3.6%. Core inflation rose 3% in September, above the Fed’s 2% target, based on delayed reporting from the BLS. 

What happens next with mortgage rates?

The Fed left the door open to a final rate cut this year in December, but only slightly. Powell addressed why a cut might not be on the table: 

“We are at a place where we have, in fact, cut two more times. Now we are 150 basis points closer to neutral than we were a year ago. There is a growing chorus now of feeling like maybe this is where we should at least wait a cycle.”

Powell elaborated that the board does not see weakness in the job market accelerating and unemployment is low, even though job creation is also low. “You don't see anything saying the job market, or really any part of the economy, is making a significant deterioration.” 

Uncertainty around the government shutdown and lack of data could increase tension around future rate decisions.