What the Recent Fed Rate Cuts Mean for You and Mortgage Rates by Dan Habib, summarized and explained by Brandon Goldberg

On September 18, the Federal Reserve lowered a key interest rate by 0.5%, bringing it to a range of 4.75% to 5%. While this rate cut doesn’t directly lower mortgage rates, it can still affect them indirectly. This key rate, known as the Fed Funds Rate, impacts short-term loans like credit cards, car loans, and business loans. It also influences how investors view longer-term loans, like mortgages.

How Does This Rate Cut Affect Mortgage Rates?

When the Fed cuts rates, it generally makes shorter-term loans cheaper. For example, if you have an Adjustable Rate Mortgage (ARM), which adjusts based on short-term rates, you may start seeing lower payments in the future. On the flip side, long-term rates, like those tied to 30-year mortgages, are a bit trickier—they depend more on expectations about the economy, inflation, and what the Fed will do next.

Right now, the Fed is sending signals that they think inflation is under control. That’s key because, in the past, high inflation has caused mortgage rates to rise. Inflation eats away at the value of money over time, and lenders raise rates to make sure their return on loans (like mortgages) still makes sense, even when the dollar’s value drops.

But by cutting rates, the Fed is saying, “We’re comfortable with where inflation is headed,” which is great news for homebuyers and homeowners alike. Why? Because it suggests that mortgage rates might begin to come down, making buying or refinancing a home more affordable.

The Bigger Picture on Rates and the Economy

Here’s another reason why the Fed’s recent move matters: They haven’t cut rates like this since March 2020 when the COVID pandemic was shaking the economy. They had been steadily raising rates to fight inflation, and now they’re signaling that the fight might be winding down. In fact, the Fed also hinted they plan to cut rates further—another 0.5% this year and 1% next year.

This could loosen up the economy, giving businesses easier access to loans, which could help spur growth and potentially lower mortgage rates even more. The Fed also expects inflation to drop to 2.2% next year, which is another good sign for long-term rates like mortgages.

However, the Fed is also keeping an eye on the job market. They predict the unemployment rate will tick up a bit, which is something they don’t want to see rise too fast. If the economy slows too much and job losses become a concern, they may act more aggressively to avoid a recession, which could also help bring down mortgage rates.

What Does This Mean for You?

The bottom line is that while this recent rate cut won’t instantly slash mortgage rates, it sets the stage for a more favorable mortgage environment in the coming months. As the Fed continues to ease rates, we’re likely to see long-term rates, including mortgages, drop as well.

But don’t expect this to happen overnight. The trend is likely to be gradual, not a straight line down. The first cut is often the largest, and from here, any future cuts will probably be smaller—unless something unexpected happens, like a big jump in unemployment.

So if you’re in the market for a new home or thinking of refinancing, it might be worth keeping an eye on these developments. Mortgage rates are likely to trend lower, but patience is key.