Federal Reserve Cuts Rates in September

Fed cuts in September

The Federal Reserve voted for its first 2025 cut to the federal funds rate in September.

Despite the latest rise in inflation, the weakening labor market and elevated uncertainty were enough for the central bank to make the quarter-point cut.

“Federal Reserve rate cuts are a positive signal for borrowers and are expected to contribute to a continued, gradual downward trend in mortgage rates,” said Selma Hepp, chief economist at Cotality. “However, the trajectory for the rest of 2025 will be influenced by a complex interplay of the Fed’s actions, the bond market’s reaction, ongoing inflationary pressures, and the fundamental supply and demand dynamics within the housing market.”

How will mortgage rates react to the Fed news?

Interest rates typically rise alongside increases to the fed funds rate and decline after cuts. However, mortgage rate movements varied in the immediate aftermath of the most recent Fed decisions.

The day following each of the last two 25-point rate cuts in November and December, the average 30-year fixed-rate mortgage (FRM) respectively decreased one (0.01%) basis point and jumped 12 (0.12%) basis points week-over-week, according to Freddie Mac. After January, March, May, June, and July’s rate holds, the 30-year FRM dipped one (0.01%) basis point, rose two (0.02%), stayed flat, fell four (0.04%), and two (0.02%) from the week prior.

Over the last three months, rate movements hit a downswing. The average 30-year FRM gradually descended from 6.84% on June 12 to 6.35% on September 11. The first Fed cut of 2025 will likely keep interest rates following a similar trajectory in the near-term.

“A Federal Reserve rate cut this week has already been priced into mortgage rates, so the immediate impact will be minimal,” said Hepp. “However, while a single rate cut may not cause a significant additional drop, a series of anticipated cuts for the rest of 2025 and into 2026 could continue to put gradual downward pressure on mortgage rates.”

In its post-meeting statement, the FOMC said economic activity moderated over the first half of the year, with slowing job gains, low-but-growing unemployment, and somewhat elevated inflation.

The inflation rate progressed toward the FOMC’s 2% goal to begin 2025 before most recently rising to 2.9% in August from 2.7% in July, according to the Bureau of Labor Statistics. The Fed has stood adamantly by its need for sustainable, decelerating inflation for a cut to be called for. A Fed cut followed by decreasing mortgage rates would be welcomed by house hunters, many who paused their search due to lack of affordability.

“Rates today feel high compared to the rock-bottom levels of 2020, but in a historical context, they’re still very reasonable,” said Charles Goodwin, head of bridge and DSCR lending at Kiavi.

“The biggest mistake I see is waiting for the perfect rate. If you’re ready to buy, the smartest move is still to lock in your rate now. Waiting on the sidelines for a big drop is risky since history shows Fed cuts don’t always flow through to mortgages. A home purchase should be about readiness: do you have a contract in hand, is the payment affordable, and does the home fit your needs? That matters more than trying to time the market for an eighth or a quarter of a percent.”

The Fed’s role and September’s FOMC meeting

At its September meeting, the Federal Open Market Committee (FOMC) voted in a 11-1 majority to cut the federal funds target range by 25 basis points (with the lone nay vote opting for a 50-basis point cut). This decision marks the first cut of 2025 after five-straight holds in January, March, May, June, and July.

In addition to the fed funds rate cut, the FOMC will continue reducing its Treasury securities, mortgage-backed securities, and agency debt. The committee said it’s prepared to adjust its policy stance based on new data and evolving outlooks.

The U.S. annualized inflation rate hit a 41-year high of 9.1% in June 2022 and the Fed began taking action to tame it. Since the beginning of 2025, inflation swung down and back up, starting at 3% in January, hitting a low of 2.3% in April before climbing to 2.9% in August. The inflation rate remains above the Fed’s long-term goal of 2%.

President Trump and his administration have scrutinized the Fed, calling central bank chairman Jerome Powell a “fool” and “numbskull,” and openly asking for his resignation if a cut doesn’t come. Most recently, the President lost an court appeal trying to fire governor Lisa Cook.

In addition to the Fed’s actions, multiple economic and geopolitical factors influence mortgage rates. While the central bank technically doesn’t set mortgage interest rates itself, its monetary policies do intrinsically correlate with mortgage rate movements.

“The Fed’s decisions are based on a wide range of economic data, including inflation, employment, and overall economic growth,” said Hepp. “If the labor market shows signs of weakness or inflation continues to cool, it reinforces the case for further rate cuts, which could lead to a more sustained downward trajectory for mortgage rates.”

Based on the latest projection materials, another cut could be in store this year. The FOMC meets twice more in 2025, with the next one taking place on October 28-29.

Should you lock in a mortgage rate?

Being influenced by a bevy of factors make mortgage rates subject to high volatility — especially in volatile times.

Although projections can (and do) shift with new information, the FOMC’s latest action signaled the economic forecast lacks stability and employment showed enough weakness to make a cut. A slowing inflation rate could put more cuts on the horizon.

“Purchase buyers should lock sooner, because certainty matters when you’re under contract and heading to closing,” said Goodwin. “On the flip side, if you’re still early in your search, you’ve got more time to see if late-year declines materialize. Refinancers have more flexibility. They’re not racing against a deadline, so they can afford to wait and see if small improvements come through later this year. But don’t expect another pandemic-era plunge.”

Regardless of where rates go, you should always negotiate and get creative in budgeting. Building home equity is one of the most common ways to gain wealth and biggest advantages of owning property.

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.