What the Fed’s rate cut in December means for mortgage rates

The Federal Reserve implemented its third rate cut in a row of 2024 today (Dec. 18), cutting its benchmark federal funds rate by 25 basis points. This decision lowered Fed’s benchmark interest rate to a range of 4.25% to 4.50%, down from its previous range of 4.50% to 4.75%. This December adjustment follows earlier cuts in September and November, when the Fed adopted reductions of 50 basis points and 25 basis points, respectively. Since September, the federal funds rate has fallen by a full percentage point, a significant shift that reflects the Fed’s changing approach to supporting the economy.

The Fed’s December rate decision reflects growing confidence in the economy’s trajectory and the continued easing of inflationary pressures, despite an increase in inflation over the past few months. The big advantage of Fed rate cuts is that they can help reduce the cost of borrowing and making lending products like personal loans and housing loan more affordable — which can be a big boon for borrowers in today’s higher interest rate environment. But a drop in interest rates on loans is not guaranteed across the board, and for homebuyers and homeowners alike, the Fed’s latest rate cut raises important questions about which direction mortgage interest could be introduced.

While any reduction in the federal funds rate typically generates optimism among borrowers, the relationship between Fed policy and mortgage rates is more complex than many realize. So what does this new Fed rate cut mean for mortgage rates?

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What the Fed’s rate cut in December means for mortgage rates

While borrowers may hope the Fed’s latest move helps lower mortgage rates, the Federal Reserve’s 25 basis point rate cut is unlikely to lead to a dramatic drop. Here’s why:

It is a rate reduction – but it is modest

The December rate cut – while a positive step – is still relatively small, especially compared to September’s more significant 50 basis point reduction. Larger rate cuts tend to have a more immediate and noticeable impact on mortgage rates as they create broader economic shifts that lenders respond to. For example before September’s significant cut of 50 basis points, mortgage interest rates fell to a two-year low.

However, that is unlikely to happen now. While a 25 basis point reduction could push mortgage rates down, it is unlikely to produce a major drop. This is partly because lenders take into account a wide range of financial conditions when deciding on their home loan. So while the latest rate cut by the Fed may signal a favorable trend for borrowers, its effect on mortgage rates is likely to be gradual rather than transformative — and should a mortgage rate cut occur, it likely won’t be the same percentage drop as the Fed rate cut. either.

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Lenders have likely already factored in the Fed’s rate cut

Financial markets and lenders often anticipate Federal Reserve decisions and adjust their pricing strategies in advance. By monitoring economic data and Fed communications, lenders typically make preemptive changes to mortgage rates before an official rate cut is announced.

What this means is that by the time the cut in December took place, many mortgage lenders had already incorporated the expected reduction into their loan offerings. As a result of this proactive approach, mortgage rates are likely to show little or no immediate movement despite the Fed’s announcement. For potential home buyers, this highlights the value of keep a close eye on the price trends and act quickly when favorable opportunities arise.

The Fed’s rate cut will not offset the other risk factors at play

While the Fed’s interest rate decisions can affect where mortgage rates go, the reality is that mortgage rates are affected with more than just the Fed’s benchmark interest rate. Economic key figures such as inflation, unemployment and the 10-year government yield also plays a central role in how mortgage rates are determined by lenders.

For example, while there was no Fed meeting in Octobermortgage rates still rose due to changes in these other variables. This complex interplay means that while a Fed rate cut may contribute to lower mortgage rates, it is not the only determining factor. So borrowers should remain aware of the broader economic trends that may further affect mortgage rates when evaluating their financing options.

Bottom line

While the Fed’s latest rate cut represents another step in the right direction for borrowers, its direct impact on mortgage rates may be limited. After all, mortgage interest rates are influenced by a complex web of factors, of which the federal funds rate is only one component. For those considering a home purchase or refinance, the most important thing is to focus on what makes sense for their ideal loan timeline rather than trying to time the market based solely on Fed decisions. While lower interest rates are generally beneficial for borrowers, waiting for perfect market conditions can be counterproductiveespecially in a housing market where prices and inventory levels continue to fluctuate.

As a result, the best approach in today’s unusual interest rate and housing market environment is to maintain a comprehensive view of your financial situation while closely monitoring market conditions. You should also be prepared to act when opportunities arise that align with your personal financial goals. As the Fed continues to adjust its monetary policy stance, the mortgage market is likely to continue to evolve, creating both challenges and opportunities.