Fed cuts rates by 25 bps as inflation lingers, labor market weakens 

The Federal Reserve lowered its benchmark interest rate by 25 basis points on Wednesday, setting the target range at 4% to 4.25%.

The first cut since December 2024 marks a new phase in the central bank’s effort to balance maximum employment and stable prices. Economists say it could usher in an easing cycle with direct implications for housing.

“Recent indicators suggest that growth of economic activity moderated in the first half of the year. Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated,” the Federal Open Market Committee (FOMC) said in a statement.

“The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen.”

The move brings benchmark rates back to levels last seen in November 2022, when the range stood at 3.75% to 4%. Fed officials have acknowledged that inflation remains above their 2% annualized target, but they pointed to softening labor market data in the decision to lower rates, suggesting their stance may have become overly restrictive.

Inflation accelerated in August, rising 2.9% year over year compared to 2.7% in July, according to the U.S. Bureau of Labor Statistics. On a monthly basis, inflation increased 0.4%, double July’s 0.2% figure. Meanwhile, nonfarm payroll employment rose by only 22,000 jobs and the unemployment rate held firm at 4.3%.

Fed Chair Jerome Powell told journalists Wednesday that while the unemployment rate remains low, it has edged up. Job gains have slowed and downside risks to employment have increased. Inflation has risen recently and remains somewhat elevated, while changes to government policies — including higher tariffs — continue to evolve, leaving their effects on the economy uncertain.

Powell said a “reasonable base case scenario” is that these effects will be relatively short-lived. But they could also prove more persistent — a risk that needs to be managed. Based on this assessment, the Fed shifted monetary policy from restrictive to more neutral territory.

Wednesday’s Fed decision comes after sustained pressure from the Trump administration, which has pushed for faster monetary easing. Among the administration’s actions, it has shadowed Chair Jerome Powell, brought mortgage fraud accusations against Fed Governor Lisa Cook and installed Stephen Miran to fill the remainder of Adriana Kugler’s term through January 2026 following her resignation on Aug. 1.

Miran was the only official to vote for a 50-bps cut this week, a move typically taken when the Fed feels “policy is out of place and needs to move quickly,” which is “not at all what I feel, certainly now,” Powell said.

Regarding Miran’s ties to the Trump administration and concerns about Fed independence, Powell emphasized that there are 19 participants, with 12 voting on a rotating basis. “The only way for any voter to really move things around is to be incredibly persuasive (…) with really strong arguments based on the data,” Powell added.

Fed’s ‘dovish’ moves

The Fed also released its Summary of Economic Projections (SEP) after Wednesday’s meeting. Officials now expect the federal funds rate to end the year at 3.6%, compared to 3.9% in June.

The 2025 projection for the unemployment rate remained at 4.5% (edging lower thereafter), as did the 3% forecast for Personal Consumption Expenditures (PCE) inflation, with the 2% target expected to be reached in 2028. Real gross domestic product estimates were revised upward, from 1.4% in June to 1.6% in September.

“We have 10 participants out of 19 who wrote down two or more cuts for the remainder of the year, and nine who wrote down fewer than that — in fact, in a good number of cases, no more cuts,” Powell said. “We’re in a meeting-by-meeting situation; we’re going to be looking at the data.”

He also added that, “I hadn’t said that I thought a quarter-point would make a huge difference to the economy, but you’ve got to look at the whole path of rates, right?”

“Rather than a pivot, the cut is likely to be framed as a recalibration — an effort to preserve optionality as the economy slows,” First American senior economist Sam Williamson said in a statement. “Markets have swiftly priced in a more dovish Fed, with three rate cuts expected by year-end.” 

That shift has pulled 10-year Treasury yields lower, dragging mortgage rates down as well. HousingWire’s Mortgage Rates Center showed 30-year conforming loan rates averaging 6.45% on Tuesday — 19 basis points lower than a week earlier.

“Combined with a narrowing mortgage spread, mortgage rates stand at 11-month lows — offering home buyers a welcome affordability boost,” Williamson said. “Though the improvement is modest, housing’s sensitivity to rates means even small declines can unlock demand.”

Cotality chief economist Selma Hepp said the immediate impact to mortgage rates will be minimal, but the anticipated cuts for late 2025 and early 2026 could make a difference. Mortgage rates “are likely to continue trending toward the 6% range by the end of the year, although they are still expected to remain above 6%,” she added. 

“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,” Hepp said in a statement. “There are potential risks and competing forces to consider — if inflation persists or unexpectedly increases, it could cause mortgage rates to rise again.” 

‘Reactionary move’

Erik Schmitt, consumer direct executive for Chase Home Lending, said that it’s difficult to predict where rates will go as they don’t always move in predictable ways.

“While we are seeing positive indicators of lowering rates, there is always the possibility for rates to go up again,” Schmitt said, adding that Chase has seen increased demand from prospective buyers as rates have dipped in recent weeks. 

At New York-based Tomo Mortgage, CEO Greg Schwartz expects the Fed to keep easing with “roughly three cuts by year-end if incoming data on inflation and jobs continues to soften.”

“A single 25 bp cut is largely priced in, so the move alone should not swing mortgage rates much. Mortgages key off the 10-year Treasury, which reflects both the current decision and the forward path. If the SEP and press conference indicate the Fed is seeing moderating inflation and a softer economy, that could pressure the 10-year lower and nudge mortgage rates down” 

Foundation Mortgage CEO Marc Halpern characterized the Fed’s action as “a reactionary move, rather than a proactive one, aimed at reversing a slowdown in the economy.”

“This is particularly notable in the mortgage market, where lenders have already priced in at least two rate cuts this year,” Halpern said. “With only two Fed committee meetings left until next year, and considering consumers are showing increasing signs of stress as inflation remains stubborn, we may see a rate cut at every meeting until 2026.”