Mortgage Rates Soften as Fed Prepares to Shift Policy Gear

The Federal Reserve is expected to cut interest rates twice by 2025, a shift from the earlier assumption that no rate cuts would occur this year. As of early September, markets are pricing in a high probability—around 90%—of a rate reduction at the Fed’s policy meeting on September 17. This would bring the federal funds rate down to a range of 4.00% to 4.25%, a 25-basis-point cut from its current level of 4.25% to 4.50%. Analysts suggest this is a modest but significant step in the Fed’s broader strategy to ease borrowing conditions amid concerns over inflation and rising unemployment [1].

The anticipated rate cut is expected to have a ripple effect across the economy, particularly in the mortgage market. Historically, Fed rate reductions have led to lower mortgage rates, though the impact is often gradual and limited in the short term. In previous cycles, such as in 2024, larger rate cuts—such as a 50-basis-point reduction—were associated with more immediate and pronounced declines in mortgage rates. However, the expected 2025 cut of only 25 basis points is likely to result in a muted response, especially in the early days following the announcement [1].

Importantly, many mortgage lenders have already begun adjusting their rates in anticipation of the Fed’s move. This means that homebuyers may not notice a dramatic drop in mortgage rates immediately after the September 17 meeting. Instead, the full impact of the rate cut could take several weeks to materialize, as financial institutions and mortgage markets fully adjust to the new policy environment. This preemptive pricing also highlights how market expectations can influence financial conditions before official policy decisions are made [2].

Beyond the Fed’s actions, other factors influence mortgage rates, including the 10-year Treasury yield, economic data, and broader investor sentiment. The 10-year yield, in particular, has been a key determinant of long-term borrowing costs. If this indicator continues to trend downward, it could amplify the effect of the Fed’s rate cut and further reduce mortgage rates, even before the policy change becomes official [2]. Data from FreddieMac shows that 30-year mortgage rates have already declined from 7.04% in January 2025 to 6.56% by the end of August, indicating that the rate-cutting environment is already taking hold [2].

Borrowers are advised to remain proactive in the current climate. While the Fed’s policy actions are important, they are not the sole driver of mortgage rates. Homebuyers and refinancers are encouraged to improve their credit scores, reduce debt-to-income ratios, and shop around for the best rate offers. These steps can help individuals secure more favorable terms, even in the current high-rate environment [2].

The possibility of a second rate cut in 2025 is also being discussed among analysts, though the timing and likelihood remain uncertain. What is clear is that the Fed is now on a more aggressive path to ease monetary policy than previously expected. This shift reflects a broader recalibration of economic expectations and signals a growing consensus that further easing will be necessary to support economic stability [1].

Source: [1] How low will mortgage rates fall with a September Fed rate cut? (https://www.cbsnews.com/news/how-low-will-mortgage-rates-fall-september-2025-fed-rate-cut/) [2] Why mortgage rates may fall before the September Fed rate cut is issued (https://www.cbsnews.com/news/why-mortgage-rates-may-fall-before-september-2025-fed-rate-cut/) [3] Here's one way the Fed could lower mortgage rates almost overnight, and it's not the rate cut Trump wants (https://www.marketwatch.com/story/heres-one-way-the-fed-could-lower-mortgage-rates-almost-overnight-and-its-not-the-rate-cut-trump-wants-76ec4819)