Fed delivers another 25-bps rate cut. Mortgage lenders prepare to scale up

The Federal Reserve delivered a 25-basis-point cut to its benchmark interest rate on Wednesday, setting the target range at 3.75% to 4%. The move, which brings the federal funds rate to its lowest level in three years, comes amid a softening labor market and inflation pressures.

Monetary policy watchers expect another cut in December, which — combined with a shift in the Fed’s balance-sheet strategy — could bring additional relief to mortgage rates, which are now at their lowest levels of the year.

The 25-bps cut was confirmed by a 10-2 vote. The dissenting votes came from Fed Governor Stephen Miran, who sought a 50-bps cut, and Kansas City Fed President Jeffrey Schmid, who voted for no change in the policy rate.

The Federal Open Market Committee (FOMC) also confirmed that it would end its quantitative tightening (QT) program, a rumored development in recent weeks. In a statement, the FOMC said that starting in December, it would roll over at auction the amount of principal payments from the Fed’s holdings of Treasury securities that mature in October and November beyond a monthly cap of $5 billion.

Additionally, effective Dec. 1, it announced it will begin reinvesting the amount of principal payments from the central bank’s holdings of agency debt and agency mortgage-backed securities (MBS) received in October and November that exceeds a cap of $35 billion per month. These funds will be moved into Treasury securities to “roughly match” the maturity composition of Treasury securities outstanding.

Fed Chair Jerome Powell told journalists Wednesday that the decision is consistent with “ample reserve conditions.” Since the beginning of QT more than three years ago, the Fed has reduced its balance sheet by $2.2 trillion, decreasing it from 34% to 21% of gross domestic product (GDP).

The strategy to reinvest in Treasury bills will enhance the Treasury-based balance sheet and reduce its duration. At some point, to maintain its share of GDP, the Fed will need to increase its reserves again.

Economists say the federal government shutdown has limited access to employment data and delayed the release of some inflation figures. On Friday, the U.S. Bureau of Labor Statistics reported that inflation in September reached its highest level of the year, rising 3% annually and 0.3% monthly, down from 0.4% monthly growth in August.

“The government shutdown has limited access to fresh employment data, leaving policymakers with less visibility into the underlying health of the labor market,” Sam Williamson, senior economist at First American, said in a statement. “If the shutdown persists, it would further cloud the outlook and complicate the Committee’s decision set, even as market expectations remain confident about another cut in December.”

According to Williamson, Wednesday’s decision marks “another step toward a more neutral policy stance as the Fed navigates a landscape clouded by uncertainty.” 

Powell said that Wednesday’s decision was a risk management move aimed at aligning monetary policy more closely with a neutral stance, especially given the conflicting mandates faced by the Fed. Data from both the public and private sectors indicated that “conditions in the labor market seem to be gradually cooling, and inflation remains somewhat elevated,” according to the FOMC’s statement.

According to Powell, available evidence indicates that both layoffs and hiring remain low, with downside risks to employment appearing to increase in recent months. Meanwhile, inflation has eased significantly from its mid-2022 peaks.

Prices for goods are rising due to tariffs, but the base-case scenario suggests that this increase is likely to be short-lived, in contrast to the disinflation seen in services. Powell also mentioned that activity in the housing sector remains weak.

As the shutdown continues, it will negatively affect economic activity, but these impacts are expected to reverse once the shutdown is lifted, Powell told journalists. This situation may also influence the rate decision for December, where a further reduction is “not a foregone conclusion,”he said.

Where will mortgage rates head?

The Fed rate cut comes as the 10-year Treasury yield is trading lower, dragging mortgage rates down as well. HousingWire’s Mortgage Rates Center showed 30-year conforming loan rates averaging 6.28% on Tuesday afternoon — 5 bps lower than the previous week.

Michele Raneri, vice president and head of U.S. research and consulting at TransUnion, said that mortgage rates, in particular, have responded swiftly to Fed moves. 

“While mortgage rates don’t always move in lockstep with the Fed’s target rate — often pricing in anticipated future cuts, the continued easing of monetary policy may well push rates even lower,” Raneri said in a statement.

“This presents a tangible opportunity for consumers. For example, a new home buyer securing a $350,000 mortgage at a 6.75% interest rate could potentially see monthly payments drop by nearly $150 from peak highs with another 25-basis point reduction.” 

Amid this backdrop, Charles Goodwin, vice president and head of bridge and DSCR lending at Kiavi, said, “We expect to see mortgage rates remain relatively flat, with only a slight downward trend in 2026.”

“While the Fed is taking action to ease short-term rates, long-term yields are likely to remain at current levels. For rates to drop considerably, we would need to see either a sharp decline in the 10-year Treasury yield or a permanent breakdown in inflationary pressures, which would force the Fed to signal aggressive, sustained rate cuts to drive down longer-term bond yields.”

Interest rate policy remains central to the equation, but changes to the Fed’s balance sheet could also influence mortgage rates. A halt to quantitative tightening (QT) could restore a steady source of demand in Treasury markets, nudging longer-term yields lower.

“With mortgage rates already hovering just above three-year lows, even a modest dip could further enhance affordability and stoke housing demand,” Williamson said. 

Impacts on the industry

Scott Ferrell, executive vice president and director of capital markets at AnnieMac Home Mortgage, said that if rates do drop, the lender is ready to “hire quickly if we need to add capacity.”

Nash Paradise, director of sales at UMortgage, said that rates “have dropped almost a full percent this year from the highs.” 

“We’ve spent so much of the last three years on just wishful thinking, hoping and assuming: ‘Well, rates can’t stay high this long, right? They have to come down,’” Paradise said. “But there wasn’t much data to back up how they were going to come down. I feel like now, for the first time since 2022, we actually have the pieces of the puzzle.” 

Paradise added he expects some consolidation to continue as companies are willing to spend to position themselves to capture market share as competition picks up.