Fed Rate Cut December 2025: Mortgage Interest Rates

• 25 basis points, 0.25%, rate cut
• Federal funds target range: 3.50% - 3.75%
• Three dissents
• One 25 basis point cut projected in 2026

The Federal Reserve cut its benchmark rate by another 25 basis points on Wednesday, in spite of three dissents. One 25 basis point rate cut is projected for 2026. Mortgage rates, which had already priced in a December cut, may creep up if the market comes to anticipate a pause on cuts in January. 

Federal Reserve Chairman Jerome Powell attributed today's rate cut to higher unemployment in spite of stubborn inflation, but noted tension on the board regarding how to address its dual mandate of maximum employment and price stability. 

The target range for the federal funds rate is 3.50% - 3.75%. It was the third time the Fed cut the benchmark rate this year. 

What Wednesday’s rate cut means for mortgages

Mortgage rates are likely to hold steady or possibly increase in the short-term (as they’ve done following each rate cut earlier this year). Keep in mind that mortgage rates are set by lenders who often price in the likelihood of future rate moves — today’s cut was widely expected and already reflected in rates.

Interestingly, the market continues to price in more than one rate cut next year, in spite of today's dot plot indicating only one 25 basis point cut in 2026. Rates may rise if the market adjusts its expectations to be more in line with the Fed's.

Impact on home buyers

Home buyers may be in for a surprise if expecting a much lower rate environment. Though the Fed cut rates today and anticipates another 25 basis point cut in 2026, language in the Fed's statement suggests a rate hold in January. 

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 at 4.166% on Wednesday afternoon.

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 a cut is expected next year, it's not guaranteed. If inflation remains high 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.

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 expand and invest. 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%, based on the most recently available data from the Bureau of Labor Statistics (BLS). Core inflation rose 3% in September (also based on the most recent data), well above the Fed’s 2% target. 

What happens next with mortgage rates?

The Fed left the door open to one rate cut in 2026, but not necessarily in January. Unless sentiment changes, mortgage rates may steady or even increase leading up to January's meeting.