Fed Rate Decision January 2026: Mortgage Interest Rates

• No change
• Federal funds target range: 3.50% - 3.75%
• 2 dissents, in favor of cutting rates

The Federal Reserve held the federal funds rates steady on Wednesday, as expected. Mortgage rates — currently at long-term lows — had already priced in today's rate hold and are more likely to drop or rise in response to future rate cut bets. 

When asked about the conditions that would merit another rate cut, Federal Reserve Chairman Jerome Powell emphasized that there was broad support across the committee for holding rates steady, and reiterated the Fed's commitment to considering the data as it comes in.

Today's rate decision comes amidst a backdrop of extraordinary political pressure to drop rates, including a criminal investigation of Powell by the Trump administration's Justice Department. While the Fed left open the option of future cuts this year, it did not indicate when or what, in particular, would influence that decision.  

The target range for the federal funds rate remains at 3.50% - 3.75%. 

What Wednesday’s decision means for mortgages

Mortgage rates are unlikely to move much in the short-term, unless the market adjusts its expectations of two to three cuts this year to align with the Fed's (the dot plot released after December's meeting indicated just one 25 basis point cut in 2026.) Keep in mind that mortgage rates are set by lenders who often price in the likelihood of future rate moves — today’s rate hold was widely expected and already reflected in rates.

Powell's term as Fed chair expires in May. If he chooses to stay on as a governor (his term expires in 2028), it could have an impact on rates. The incoming Fed chair is widely expected to be dovish on rates, while Powell is considered a centrist or cautiously hawkish or dovish.

Impact on home buyers

While mortgage interest rates are a key element to housing affordability, it's also true that a low interest rate environment can drive up real estate prices or keep them elevated. If you're buying near-term, it's unlikely mortgage rates will change much, nor home prices. If you're looking to buy six or more months out, it's possible you could see lower rates later this year, which in turn could contribute to higher demand for homes and higher or steady home prices. 

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 4.263% 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 3.2%, based on data released in January by the Bureau of Labor Statistics (BLS). Core inflation rose 2.6% in December, above the Fed’s 2% target. 

What happens next with mortgage rates?

The Fed left the door open to one rate cut in 2026, while the market expects additional cuts. If Powell leaves the Fed once his term expires, a seat would open up for a new governor. It's widely expected that his replacement would favor a more dovish approach to monetary policy.