Fed Rate Decision September 2025: Impact on Mortgages

• Size of cut: 25 basis points, 0.25%
• New target range: 4.00% - 4.25% 
• 1 dissent: Stephen Miran in favor of a 50 basis point cut 
• Dot plot: 2 more cuts anticipated this year 

The Federal Reserve cut its benchmark rate by 25 basis points on Wednesday, a widely anticipated move aimed at supporting a cooling labor market as inflation remains sticky. The target range for the federal funds rate is at 4.00% to 4.25%. It was the first time the Fed has cut the benchmark rate since December 2024.

"Overall, the market slowing in both the supply of and demand for workers is unusual," said Federal Reserve Chairman Jerome Powell. "In this less dynamic and somewhat softer labor market, the downside risks of employment have risen. Inflation has eased significantly from its highs in mid-2022 but remains somewhat elevated relative to our 2 percent longer run goal."

The decision comes amid extraordinary political pressure: a failed bid to remove Governor Lisa Cook from the Fed's Board of Governors earlier this week and the confirmation of Stephen Miran to an unexpired seat on the eve of the meeting — developments that have intensified scrutiny of the Fed’s independence. 

What Wednesday’s rate cut means for mortgages

Mortgage interest rates have been on a general downward trajectory since May — the week ending September 11 saw the largest weekly drop of the year for 30-year fixed rate mortgages. Though Wednesday’s rate decision was widely expected, the 10-year treasury yield dropped below 4% on the announcement, trading near this year's lows. Since mortgage rates track the 10-year Treasury yield, the decline could bring borrowing costs lower.

The Fed dot plot indicates two more cuts this year. We could see mortgage rates continue to fall as lenders price in that probability.

Impact on home buyers

Home buyers may be breathing a collective sigh of relief at the prospect of a lower rate environment. But don’t expect a one-for-one drop. Homebuyers should watch the 10-year treasury yield and lender rates over the next few days as markets digest the dot plot and Powell’s comments.

And with homes sitting longer on the market and supply building, buyers can expect Wednesday’s rate cut to ease borrowing costs without unleashing a surge in demand that would push prices up. 

Impact on refinancing

Refinancing activity had increased sharply off of already-low rates. Given Wednesday’s rate decision and projection of two additional rate cuts,  we could see mortgage refinance rates drop further. Now could be an excellent 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 7.25%.  

But refinancing is a tool to manage long-term risk and hedge against further volatility. Though future cuts are expected, they’re not guaranteed. If inflation remains sticky and the labor market rebounds, we could see rates stall or even rise from their current long-term lows. Questions around the extent and amount of tariffs remain, which is in large part driving the Fed’s cautious approach.

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. Moves to fire governor Lisa Cook and the installation of the administration’s top economic adviser to a vacant seat highlight a growing challenge to the institution’s independence.

A note on tariffs

Higher import costs from tariffs being absorbed by domestic businesses risk keeping inflation elevated, complicating future rate cut decisions. While officials remain focused on core economic data, trade policy has added another layer of uncertainty.  

"Higher tariffs have begun to push up some prices in some categories of goods but their overall effect on economic activity and inflation remain to be seen," said Powell. "A reasonable base case is that the effects on inflation will be relatively short-lived, a one-time shift in the price level. But it is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed."

Fed rate cut pros and cons

Pros

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 in September.

Cons

However, 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% and was the largest factor contributing to the CPI index in August — which is at 2.9%, above the Fed’s 2% target.

What happens next with mortgage rates?

The Federal Reserve signaled two more rate cuts this year, with the market anticipating a 93.2% chance of another 25 basis point cut in October and a 92% chance of a 50 basis point cut by year's end, according to the CME’s FedWatch tool.

The Fed will be keeping a close eye on August’s PCE index, coming September 26, along with monthly jobs reports, next due October 3, retail sales data, and the ongoing impact of tariffs. Put simply, if inflation continues to cool and the labor market softens, the Fed will feel more confident cutting in October or December. But if prices stay sticky or jobs data remains hot, the Fed may hold off.