In response to mounting warning signs from the labor market, the Federal Reserve is preparing to cut its benchmark interest rate for the first time in nine months.
Most economists and investors expect Fed Chair Jerome Powell and the rest of the Federal Open Market Committee (FOMC) to cut the central bank’s overnight rate by a quarter-point on Wednesday.
Mortgage rates have already fallen in anticipation of the move, with the average 30-year fixed rate reaching an 11-month low of 6.35% last week.
It comes as welcome news for prospective homebuyers, who stand to benefit from the lower borrowing costs. However, for those who are holding out in expectation that mortgage rates will automatically fall further after the FOMC meeting, disappointment may await.
That’s because financial markets have already priced in three 25-basis-point Fed cuts before the end of the year, and three further cuts of that size by the end of 2026.
“This means that the markets have high expectations for the Fed’s upcoming rate cuts, and the market could very well be disappointed by a slower Fed pace,” says Realtor.com® Chief Economist Danielle Hale.
If the FOMC decision is contentious and split, with dissenting votes against the cut, or if policymakers issue forward guidance that doesn’t match the market’s expectations for future rate cuts, mortgage rates could move higher in response.
A similar scenario played out in September 2024, when mortgage rates plunged to a two-year low ahead of expected Fed rate cuts, but then rates began rising as it became clear that the Fed cuts would not be as extensive as markets expected.
Although mortgage rates have fallen in recent weeks, they have not yet reached the lows near 6% seen in early September 2024—when the federal funds rate was a full percentage point higher than it is today.
“I expect this drop [in mortgage rates] to continue at least until the upcoming Fed meeting,” says Hale. “After the Fed meeting, however, I expect that mortgage rates are more likely to steady or even edge higher because markets are positioned to expect relatively more easing and could be disappointed by the Fed’s forward guidance.”
The Fed does not directly set mortgage rates, which instead tend to follow the yields of long-term bonds. Those bond markets are influenced by investor expectations about future Fed policy and financial conditions, including inflation and government deficits.
In a call with reporters last month, National Association of Realtors® Chief Economist Lawrence Yun warned that higher inflation and concerns about mounting government debt could put upward pressure on mortgage rates, despite the Fed easing.
“Mortgage rates may not decline, even with the Fed rate cut, if there is high inflation, and also if somehow the Treasury debt issuance becomes large,” he said. “That’s going to prevent the mortgage rate from meaningfully declining.”
Political drama surrounds the Fed’s interest rate decision
The Fed has long taken pains to preserve its independence from political pressure or influence, but that tradition has been challenged in recent months by President Donald Trump‘s public pressure campaign for lower rates.
Soon after starting his second term, Trump began publicly demanding lower rates, at various points threatening to fire or sue Powell. Trump has said that lower rates would help the government refinance its massive debt on more favorable terms and also boost the housing market.
Powell has resisted, however, telling Trump at a White House meeting in May that the central bank’s future decisions on interest rates would be “based solely on careful, objective, and non-political analysis,” according to a Fed statement on the meeting.
The standoff has intensified in recent weeks with Trump’s attempt to fire Lisa Cook from the Federal Reserve Board of Governors over allegations of mortgage fraud.
Cook, a Biden appointee, had supported Powell in holding rates steady the last time the FOMC voted on policy in late July. She is currently battling Trump in court and is expected to vote on Wednesday after a judge temporarily blocked the president’s attempt to remove her.
The FOMC normally has 12 voting members, but is currently down to 11 after Board of Governors member Adriana Kugler resigned abruptly and without explanation last month.
The resignation of Kugler, also a Biden appointee, gives Trump an opening to add a new voter to the FOMC who is sympathetic to his vision of easy money.
The replacement he has nominated, White House economic adviser Stephen Miran, may be confirmed in a Senate vote on Monday evening, which would allow him to participate in the FOMC meeting this week.
If confirmed, Miran would be the first sitting White House official on the Fed’s board in modern history, shattering precedent and adding a new political dimension to the central bank’s governance.
Why the Fed is cutting rates now
The Fed uses higher rates to curb inflation, and lower rates to boost the job market, the two halves of its dual mandate to maintain steady prices and maximum employment.
Citing fears of lingering inflation, Fed policymakers have held the central bank’s policy rate steady at a range of 4.25% to 4.5% since December.
Now, a string of alarming reports revealing weakness in the labor market is finally prompting the FOMC to act—as well as giving Trump and other critics support for their contention that the Fed has waited too long to act.
The initial blow came in early August, days after the last FOMC meeting, when the Labor Department issued a sharp downward revision to prior job growth numbers for May and June.
Subsequent revisions show that the economy has added just 27,000 new jobs on average each month starting in May, far below the 100,000 pace viewed as necessary to prevent rising unemployment.
As well, there are now more unemployed job seekers than job openings in the country for the first time since 2021. And last week, new unemployment claims, a sign of layoffs, jumped to their highest level in four years.
All of this provides the Fed ample reason to cut rates. However, at the same time, inflation has begun to rear its head again, with overall inflation rising to 2.9% annually in August, presenting the Fed with a thorny dilemma.
“Even though inflation has inched up again and remains above the 2% target, the Federal Reserve is giving more weight to the labor force numbers and will cut rates to help stave off further deterioration,” says Bright MLS Chief Economist Lisa Sturtevant. “Given inflation is still above target, however, I expect we will see a 25-basis-point cut, and not something larger this month, while future rate cuts may be more dependent on the inflation trajectory.”
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