How The Fed's September Rate Cut Impacted Mortgage Rates

By Susan Isaacs

The Federal Reserve’s FOMC meeting on September 16th, 2025, brought the quarter-point benchmark rate reduction expected by mortgage rates watchers–then mortgage rates went up following the announcement.

Why? The simple answer: Because the quarter-point cut was already priced in pre-FOMC meeting.

At 2 pm EST on Sept. 16th, the Fed dropped both its official rate decision and the new dot plot. As the underlying bond market responded, most mortgage lenders issued mid-day changes to their rates. The net effect was that mortgage rates rose in the afternoon compared to the previous day’s latest quotes, and continued to spike for two days following the Fed cut, to the levels that preceded the September 5th jobs report.

While the headlines often focus on whether the Fed cut rates, that’s rarely the part that actually moves mortgage rates. The real action happens in the details, especially when the Fed releases its updated dot plot (the chart showing where each Fed official thinks rates are headed over the next few years).

Markets were focused on the dots, which pointed to a slightly more aggressive path for 2025 than some traders had priced in. The chart suggested the odds of two more cuts next year, rather than just one, and that gave bond markets a brief boost.

At 2:30 pm, Fed Chair Jerome Powell took the mic for his press conference and went out of his way to frame the cut as a “risk management” move, not a signal that more cuts are guaranteed. He reminded everyone that the dot plot isn’t a promise; the Fed will keep making decisions one meeting at a time, guided by new economic data as it comes in.

Bond markets, the real engine behind mortgage rate changes, whipsawed through the afternoon. Initial optimism faded as Powell spoke, and by the end of the press conference, bond yields had climbed back above where they started. And that’s why mortgage lenders across the country issued mid-day rate changes.

How could mortgage rates play out longer term?

Fannie Mae revised its 30-year fixed mortgage rate predictions downward:

• Q4 2025: > 6.4% (previously 6.5%)
• Q1 2026: > 6.2% (previously 6.4%)
• Q2 2026: > 6.1% (previously 6.2%)
• Q3 2026: > 6.0% (previously 6.1%)
• Q4 2026: > 5.9% (previously 6.1%)

The OECD (Org. for Economic Cooperation and Development) says the Fed has scope to cut its key interest rate another three times despite above-target inflation, and predicts the US policy rate will be trimmed to 3.25% to 3.5% by spring 2026 as a result of high trade tariffs hindering economic momentum. In its interim economic outlook, the organization further forecast a continued slowdown in American growth to 1.5% in 2026.

OECD chief economist Álvaro Pereira told the press; “Given the recent change by the Fed, we expect that there likely will be another policy rate cut this year and probably two early next year.”

Many economists say the recent Federal Reserve rate cut will slightly lower mortgage rates, but the direct impact will be limited since mortgage rates are more closely tied to long-term bond yields, which have been volatile. Market sentiment and inflation risks could limit significant and immediate reductions, say experts, who predict mortgage rates will tick down a bit through late 2025.

The market’s ongoing uncertainty about the Fed’s future actions could create upward pressure on mortgage rates, despite September’s benchmark rate cut.

Factors Influencing Mortgage Rates

Long-Term Bond Yields
Mortgage rates are closely correlated with the 10-year Treasury note and other long-term bond yields. These yields moved higher as the Fed’s economic projections suggested a less aggressive path of rate cuts than the market had anticipated.

Inflation and Economic Growth
The Fed has a dual mandate; managing inflation and economic growth. The slowing U.S. job market and government policies leading to recent economic concerns may promote future rate cuts, but inflation trajectory could also pressure mortgage rates upward.

The R Word

In his latests Inside Economics Quick Take, Mark Zandi, Chief Economist at Moody’s Analytics, shows where different states and industries stand in the business cycle and what that means for the U.S. economy. Zandi says about a third are in recession, a third are treading water, and a third are in expansion.

Key watchpoints:
▪️States in recession are spread across the country, with the Northeast and DC experiencing the most strain.
▪️ California and New York are treading water. The direction they take could influence the national economy.
▪️ Goods-producing sectors are struggling. Manufacturing, mining, agriculture, transportation, distribution, and construction are all in recession.
▪️ Tech, healthcare, and education continue to grow.

Advisory

If you’re in the market for a mortgage, bookmark last week’s volatility as a reminder that mortgage rates respond to the big picture; the Fed’s outlook, the Chair’s tone, and the constant flow of new economic data; not just headlines.