Fed Cuts Rates by 25 Basis Points in December

December’s Fed cut

The Federal Reserve made its third consecutive rate cut at its December meeting, lowering the federal funds target range by 25 basis points.

The central bank began its current plan to bring down inflation in March 2022. With the most recent inflation reading at 2.7% in November and labor markets easing, the voting committee decided another rate cut was appropriate.

“While we’ve entered a period of anticipated Fed rate reductions, we now expect fewer than projected cuts next year,” said Selma Hepp, chief economist at CoreLogic. “The economy remains strong, and the job market is solid, thus there are still many reasons for the Fed to be cautious about cutting interest rates. In turn, despite the prospect of deportations and tariffs being discussed today, we won’t know the full impact until such measures are implemented. Potential policies that are being discussed by the incoming administration could apply inflationary pressure and keep the Fed on pause, or encourage the Fed to slower the pace of rate cuts.”

The Fed’s role and December’s FOMC meeting

The Fed technically doesn’t set mortgage interest rates. Multiple factors dictate mortgage rate movements, but they do intrinsically correlate with the central bank’s policy actions.

At its December meeting, the Federal Open Market Committee (FOMC) cut the federal funds target range by 25 basis points following a 50-point cut in September and a 25-point cut in November. Prior to that, the Fed held the target range steady eight consecutive times.

The annualized inflation rate hit a 41-year high of 9.1% in June 2022 but mostly followed a downward trajectory since. Over the course of 2024, the U.S. annualized inflation rate has taken a step back for every two steps forward. Despite modest upticks over the latest two months, inflation has regressed overall to 2.7% in November from 3.1% in January, according to the U.S. Bureau of Labor Statistics. It remains above the FOMC’s goal of 2%.

In its post-meeting statement, the Committee said it will “carefully assess incoming data, the evolving outlook, and the balance of risks” when considering future rate cuts. As always, the FOMC gave the caveat that it “would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of [its] goals.

In addition to cutting the fed funds rate by 25 basis points, the FOMC will also continue reducing its holdings of Treasury securities, mortgage-backed securities and agency debt. As always, the Committee will adjust its policies as necessary based on shifting economic data, outlooks, and risks. The next FOMC meeting will take place on Jan. 28-29, 2025.

According to the FOMC projection materials, the median forecast accounts for two 25-basis point cuts in 2025.

How will mortgage rates react?

After climbing to a 23-year high in 2023, mortgage interest rates followed a hills-and-valleys pattern in 2024. The latest cut should help drive interest rates downward.

The day following each of the two previous rate pauses in June and July, the average 30-year fixed-rate mortgage (FRM) posted a week-over-week decrease of four (0.04%) and five (0.05%) basis points, respectively, according to Freddie Mac. After September’s 50-point cut and November’s 25-point cut, the 30-year FRM fell 11 basis points (0.11%) and one basis point (0.01%) from the week prior.

Interest rates typically rise alongside increases to the fed funds rate and decline after cuts. In its statement, the FOMC also said economic activity keeps expanding “at a solid pace,” while job gains slowed and the unemployment rate inched up but remains low.

Inflation has progressed toward the FOMC’s 2% goal, but needed to be seen as sustainable for a cut to be called for. A Fed cut followed by decreasing mortgage rates would surely be a welcome sign for house hunters, many of who have been sidelined due to being priced out of the marketplace.

Should you lock in a mortgage rate?

Because multiple economic and geopolitical factors influence mortgage rates, they’re subject to a lot of volatility.

Although projections can shift, the FOMC’s latest action signaled the economic forecast deemed that a rate cut was seen as appropriate. As long as the pace of inflation keeps slowing sustainably, additional cuts could be on the horizon. Regardless of where rates go, you should always negotiate and get creative in budgeting. Building home equity is one of the biggest advantages of owning property and most common ways to accumulate wealth.

If you’re ready to begin your path to homeownership, talk to a local mortgage professional to see what rates and loan types you qualify for.