On December 11, 2025, the Federal Reserve cut its benchmark federal funds rate by 0.25%, marking the third rate cut this year. This brings the target range down to 3.50%–3.75% as the Fed works to support the slowing economy and keep inflation moving toward its target.
While this is important news for financial markets, the connection between Fed policy and mortgage rates is indirect—and often misunderstood.
1. What the Fed Cut Actually Means for Mortgage Rates
The Fed does not set mortgage rates. Instead, mortgage rates generally follow long-term bond yields, especially the 10-year Treasury, which react to investor expectations around inflation, economic growth, and future Fed moves.
So what happened after the cut?
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Mortgage rates have not fallen significantly—yet.
National 30-year fixed rates remain around ~6.2%, near recent lows but not dramatically different from levels before the meeting.
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Some lenders even showed slight increases, reflecting bond-market hesitations rather than the Fed’s move.
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Markets had largely priced in the rate cut ahead of time, which limited any immediate drop in mortgage pricing.
Bottom line:
Rate cuts can put downward pressure on mortgage rates, but the effect is usually delayed—and sometimes muted—because it depends on bond markets, not the Fed’s overnight rate.
2. Why Mortgage Rates Don’t Always Drop After a Fed Cut
A few key dynamics explain the disconnect:
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10-year Treasury yields barely moved after the announcement, limiting any mortgage response.
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If investors expect inflation to remain sticky or the economy to stay firm, long-term yields (and mortgage rates) may remain elevated even as the Fed cuts.
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Lenders price in credit risk, housing demand, and mortgage-backed security markets, all of which can counteract the effects of a small policy rate adjustment.
3. How the Rate Cut Affects the Housing Market Beyond Mortgage Rates
A) Homebuyer Demand
Slightly lower borrowing costs can improve affordability over time, potentially nudging more buyers into the market.
However, affordability challenges persist due to still-high home prices and limited inventory.
B) Refinancing Activity
Homeowners with higher existing rates—especially those with ARMs or older fixed-rate loans—may benefit if rates continue to drift lower in coming weeks.
C) Builders & New Construction
Lower short-term rates can reduce financing costs for builders and developers, helping support new-construction pipelines.
D) Housing-Related Stocks
Real estate–linked stocks (homebuilders, mortgage lenders, REITs) often get a modest boost from rate cuts as investors anticipate increased activity and lower borrowing costs.
4. What to Watch Heading Into 2026
A few indicators will determine where mortgage rates go next:
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Treasury yields & inflation expectations — the strongest drivers of mortgage pricing.
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Fed guidance about future rate cuts — more cuts in 2026 could push long-term yields lower.
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Housing inventory & pricing trends — lower rates only help if buyers can find homes within reach.
Final Takeaway:
The Fed’s December rate cut is a positive signal for the housing sector, but don’t expect immediate, dramatic drops in mortgage rates. Instead, look for gradual shifts as markets absorb the Fed’s outlook and long-term rates adjust. For buyers, sellers, and homeowners considering refinancing, the next several weeks will be key.
