Courtesy Steven Luttman
By Steven Luttman
September’s decision by the Federal Reserve to cut interest rates marked the first adjustment to the closely watched benchmark since late 2024. Today, we’ll cover why a cut was made, the impact seen so far, and what we should expect moving forward.
Why Cut
Private sector hiring has fallen off a cliff in 2025. While the official unemployment rate remains sub 4.5%, persistent negative revisions to prior monthly job reports, paired with lackluster household survey data points to a much softer economy. Following the cut, we heard it straight from the horse’s mouth: “Labor demand has softened, and the recent pace of job creation appears to be running below the ‘breakeven’ rate needed to hold the unemployment rate constant.” Not blunt enough? “While the unemployment rate remains low, it has edged up, job gains have slowed, and downside risks to employment have risen.”
Jerome Powell appears to be coming around to the idea that the risk of tariff-induced inflation should now take a backseat to what’s transpiring in today’s job market. To stimulate the economy, borrowing rates must be lowered.
Reaction
Changes to the Fed Funds Rate impact shorter-duration credit such as home equity lines and credit cards. While important, residential mortgage and business loan rates more closely track longer-term benchmarks—mainly the 10 year Treasury. Interestingly, longer-term yields actually rose in the days immediately following the decision to reduce rates by 25 basis points (0.25%), as they did after the last cut in December 2024.
Zoom out a few days, however, and you’ll see that a rate drop was already priced in leading up to the Fed meeting. Some experts pointed to dovish comments by Chairman Powell suggesting a less aggressive than anticipated rate cutting cycle as the reason for the brief rise. Fast forward to today, and long-term yields are nearly identical to where they stood before the Federal Reserve meeting. From a consumer standpoint, the national average 30 year fixed rate mortgage is as low today as it’s been for nearly the entire past twelve months.
Similar, But Different
There is no economy like that of the United States. Its size and composition are uniquely American, making comparisons with other major economies largely immaterial. That said, several other high profile nations have recently cut their version of overnight borrowing rates, perhaps providing some insight into where we can expect rates to head next.
The Bank of England cut its benchmark rate to 4.00% in August 2025, a reduction of 25 basis points. Since then, the UK’s 10-year and 30-year gilt yields have climbed, with the latter reaching its highest level in decades before modestly retreating. Meanwhile, Japan (the world’s fifth largest economy by GDP) has seen long term yields rise this year despite efforts to rein in borrowing costs.
More to Come
While the Fed is a single entity, its members by no means think as a monolith. Once a quarter we get a glimpse into each FOMC voter’s expectations for the future—albeit anonymously. Looking at projections for year end 2025, we see a majority of members anticipating two additional cuts to the Fed Funds Rate.
But here’s where things go off the rails: one member foresees a rate increase, effectively canceling out September’s cut. On the other end of the spectrum, another member is forecasting a 2.75%–3.0% policy range, which would require a “slash and burn” type of approach to get that low that quickly. While names are withheld, if that latter member isn’t President Trump’s hand picked appointee Stephen Miran, then I’ll be a monkey’s uncle.
Outcome
Additional cuts to the Federal Funds Rate remain the most likely outcome, but the path to lower mortgage rates is far less clear. Analysts view reductions at the final two Fed meetings of 2025 as a near certainty. Deficit spending will continue to put upward pressure on yields, as will decreased demand from certain foreign buyers of U.S. Treasuries.
President Trump has spoken often about his desire for lower mortgage rates. The administration could get creative in achieving this, potentially through renewed Federal Reserve purchasing of mortgage backed securities. As outlined by Jerome Powell during last month’s press conference, all focus is now on jobs. Significant weakness in employment (not further cuts by the Fed) is likely the most direct path to meaningfully lower mortgage rates.