As we officially enter Q4 of 2025, I’m sure everyone has seen the headlines that the Federal Reserve decided to cut the Fed Funds rate by 0.25% at their September meeting. It is all but a lock that the Fed will cut again at their October 29th meeting, with Wall Street pricing in another 0.25% cut later this month.
Before everyone starts jumping for joy, it’s important to understand that these “rate cuts” are not a blanket rate cut where all rates immediately go down. When the Fed “cuts” they are lowering the Fed Funds Rate, and the Fed Funds Rate has trickle-down effects into all other areas of the economy. Some of these effects are immediate, while others take 3 to 6 months to cycle through the economy.
In 2024 when the Fed started their cutting cycle, we saw mortgage rates and the 10 Year Treasury immediately spike up. In 2024 when the Fed did their first cut we saw the 10 Year Treasury note increase almost 40 basis points in less than a week. Mortgage rates followed suit and went up roughly 0.375% to 0.5% in the same period of time. Over time they fell back down but the immediate impact of the Fed cut is somewhat counterintuitive.
Last month when the Fed announced the rate cut we saw the 10 Year Treasury Note increase 15 basis points and mortgage rates increased about 0.125% within the first week. Since that time the Treasury is down 5 basis points so the negative impact of this year’s cut is much less than last year’s, which is good news overall for mortgage rates and housing.
The Fed appears to be in a fog about what to do with interest rates and the overall state of the economy. Over the past 3 Fed meetings Fed Chair Powell continues to be non-committal about the future of rates and almost in denial about the reports coming out concerning the economy.
Even this week, Chicago Fed President Austan Goolsbee spoke, where he started off the interview stating that the economy was “pretty stable,” only later to say that it’s deteriorating. He cited unemployment remaining at 4.3% however, when we look deeper into the numbers, it’s actually 4.34% which is 0.01% away from being rounded up to 4.4%. If unemployment had come back at 4.4% there would be additional pressure on the Fed to make a larger cut at their October meeting.
PCE is the Fed’s favorite measure of inflation and for the last 3 years the Fed continues to cite this figure as a reason to keep rates higher. The Fed wants to see inflation at 2.0% and it currently sits at 2.9%. However if we look deeper at the numbers we believe inflation is much closer to 2.0% than the Fed is seeing.
According to Fed Chair Powell, tariffs are overstating inflation by 0.3% to 0.4% and this overstating is transitory. Portfolio Asset Management is also adding 0.3% to inflation, which is somewhat of a bogus factor when you think about it. This number is created by management fees, investment banks, and money managers charge their clients to invest money.
The percentage they charge has not changed, but because the stock market has been on a run and portfolio values have increased so the overall dollars are larger. This isn’t inflation, the percentage didn’t go up, just the dollar figure, and we feel it should be backed out to get a true sense of inflation. If we take away the 0.3% to 0.4% from tariffs and the 0.3% from money management fees, the true rate of inflation is very close to the 2.0% Fed target.
So the million dollar question is where do mortgage rates go from here? The simple answer is… Down! The bigger question is when? The Fed will continue to cut and over time these cuts will trickle down into bond markets and mortgage rates will follow suit.
Inflation from tariffs will subside, unemployment will continue to rise and the Fed will be forced to use some other tools in their toolkit. NY Fed President John Williams explained this week that bond buying is a normal part of the Fed’s toolkit and while he doesn’t see it happening now it’s not off the table in the future.
Remember during the pandemic and during Quantitative Easing the Fed was the largest purchaser of Bonds and Mortgage Backed Securities. The Fed uses this lever to lower yields and mortgage rates dramatically improve.
We will also have a new Fed Chair in June of 2026 and with President Trump’s call for lower rates we’re sure the new Fed Chair will be a rate friendly one. All signs point towards lower mortgage rates in 2026 and the only question remaining is whether or not it’s Q2 of 2026 or Q4 of 2026 when all of these lines intersect.
Last time mortgage rates went down significantly we saw a massive spike in home prices. Clearly back then there was a pandemic, Americans were saving more than they ever have before and the overall situation was much different. However we would expect that as mortgage rates go down, home values will increase making this a unique time in the economy.
We understand that every client’s situation is unique and we’re more than happy to set up a consultation to build out a plan that’s right for you. Until then, have a great October everyone, and we look forward to speaking with you soon.