The Fed's Next Move: What It Means for Mortgage Rates and Your Home Purchase
If you have been following mortgage rates, you have probably heard people talk about "what the Fed is doing." But what does the Federal Reserve actually have to do with your mortgage, and what should you expect in the months ahead?
Let's cut through the jargon and make sense of it.
What the Fed Did in 2025
After holding interest rates at their highest level in over two decades for most of 2024, the Federal Reserve made three rate cuts between September and December 2025. Each cut was a quarter of a percentage point, bringing the federal funds rate down to a range of 3.5% to 3.75%.
Those cuts were a response to cooling inflation and a desire to support the broader economy. They also sent a signal to financial markets that the era of aggressively tight monetary policy was winding down.
How the Fed Affects Your Mortgage Rate
Here is something that surprises most people: the Fed does not set mortgage rates directly. The federal funds rate is the rate banks charge each other for overnight lending. Your 30-year mortgage rate is tied to the yield on 10-year Treasury bonds, which is influenced by investor expectations about inflation, economic growth, and future Fed policy.
So when the Fed cuts rates, mortgage rates do not automatically drop by the same amount. But Fed decisions shape market expectations, and those expectations move bond yields, which in turn move mortgage rates.
This is why mortgage rates started declining before the Fed even made its first cut. Markets were pricing in the expectation of easing, and bond yields fell in anticipation.
Where Things Stand Now
The latest minutes from the Federal Open Market Committee show officials are taking a cautious approach. Inflation has come down significantly from its 2022 and 2023 highs, but it remains slightly above the Fed's 2% target. That means the committee is in "wait and see" mode, weighing the risk of cutting too quickly against the risk of keeping rates too high for too long.
Most economists expect the Fed to hold steady through the first half of 2026, with the possibility of one or two additional cuts later in the year if inflation continues to moderate. However, any unexpected spike in inflation or disruption in the labor market could change that calculus quickly.
What This Means for You
If you are waiting for mortgage rates to drop to 4% or 5% before buying, you may be waiting a very long time. Most forecasts have rates staying in the upper 5% to low 6% range through 2026 and into 2027. That is meaningfully better than the 7%-plus environment of 2023, but it is unlikely to return to pandemic-era lows.
The practical takeaway is this: today's rates are already favorable compared to the recent past. Trying to time the market perfectly is a losing game. What you can control is getting pre-approved, understanding your budget, and being ready to move when the right home comes along.
The Bigger Picture
The Fed is one piece of the puzzle, but it is not the whole picture. Your individual rate depends on your credit score, down payment, loan type, and lender. Two buyers purchasing identical homes can end up with very different rates based on their financial profiles.
Want to know what rate you would actually qualify for today? Let's run the numbers. A quick pre-approval conversation can give you clarity and put you in a strong position when you find the right home.