Illustration by Lanette Behiry/Adobe Stock
A divided Fed worried about inflation and the softening jobs market cut short-term interest rates by 25 basis points on Dec. 10 — the third such cut this year.
Key points:
- The Federal Reserve announced its third consecutive rate cut on Dec. 10, putting short-term interest rates in the 3.5-3.75% range.
- But this could be the last rate cut in a while. The central bank’s updated economic forecast hints at little rate movement as officials try to balance lowering inflation with boosting the labor market.
- Even if 30-year mortgage rates stay in the low 6% range, economists say affordability could improve if home price growth remains slow and incomes continue to rise.
After announcing its third consecutive rate cut on Dec. 10, a divided Federal Reserve indicated that short-term interest rates are now in neutral territory — and officials are ready to hit pause.
Since the cut was widely expected, it probably won’t lead to much downward movement for mortgage rates. While 30-year rates have hovered around the lowest levels of 2025 in recent weeks, they remain above 6%.
What happened at the Fed’s December meeting
At its final meeting of 2025, the Fed reduced short-term interest rates by 25 basis points, putting the rate in the 3.5-3.75% range. The vote was 9-3, marking the first time in six years that three officials dissented, according to the Wall Street Journal.
The Fed also released its updated economic projections, which many were watching to learn what the central bank is expecting to happen in the new year. The forecast seemed to point toward a reluctance to make further cuts based on current economic conditions. It was nearly evenly split between those who think the rate will remain at 3.5% or above in 2026 and those who expect it to fall between 3% and 3.5%.
Powell outlines wait-and-see approach for 2026
During a post-meeting press conference, Fed Chair Jerome Powell said the housing market faces significant challenges — and that a 25-basis-point cut won’t make much of a difference. The nation’s housing supply remains low, he noted, and the ultra-low mortgage rates that some homeowners snapped up during the pandemic are discouraging many from moving since rates are now much higher.
“Housing is going to be a problem,” Powell said, later adding that the central bank doesn’t “have the tools to address a structural housing shortage.”
Much of Powell’s press conference was devoted to explaining the Fed’s more neutral stance now that it has moved away from a restrictive policy targeting inflation.
At 3%, inflation levels remain above the Fed’s 2% target. But there now seems to be more evidence that the tariffs introduced earlier this year by the Trump administration provided a temporary rise in prices — and that core components are cooling.
The softening job market is currently a bigger concern for the Fed. Its plan now is to gauge whether three straight rate cuts will be enough to ease strain in the labor market.
“We’re well-positioned to wait and see how the economy evolves,” Powell said.
A low 6% handle for 30-year mortgage rates
The 30-year fixed-rate mortgage has drifted down recently, averaging 6.19% last week, according to Freddie Mac.
A cut to short-term interest rates doesn’t directly impact mortgage rates. However, the Fed’s decision to take a wait-and-see approach moving forward may keep mortgage rates steady or push them higher in the coming weeks, according to Lisa Sturtevant, chief economist at Bright MLS.
“Rates could move higher through the end of the year as the latest meeting of the Federal Open Market Committee reveals a divide in opinions on cutting rates,” Sturtevant said. Concerns about inflation “could also push mortgage rates higher,” she added.
But an anticipated batch of new economic data could turn the tide, said Melissa Cohn, regional vice president of William Raveis Mortgage. Some labor and inflation data that was backlogged due to the federal government shutdown will be released before the Fed meets again in January.
Affordability expected to improve
Even if mortgage rates stay in the low 6% range, affordability should still improve if incomes continue to rise and home price growth remains sluggish, according to Danielle Hale, chief economist at Realtor.com.
Hale expects homebuyers will soon devote 29.3% on average of their monthly paycheck to a median priced home. If that happens, it’ll be the first time this share has dropped below the 30% threshold since 2022.
“I expect to see home sales in 2026 move more convincingly up from their 30-year lows,” Hale said.
What happens next with the labor market will also be important for home sales. While affordability is slowly improving, the weakening jobs market is likely tamping down demand for existing homes, according to Ruben Gonzalez, chief economist at Keller Williams.
Gonzalez expects 2026 to be a transitionary year, with home sales ticking up in a high inventory environment across most of the U.S.
