The Federal Reserve delivered another 25-basis-point cut to its benchmark interest rate on Wednesday, setting the target range at 3.5% to 3.75% amid signs of a softening labor market and inflation that’s still above the central bank’s 2% target.
The move marks the Fed’s third straight rate cut to end 2025, following 25-bps cuts in September and October. For 2026, monetary policy watchers expect a slow march back toward neutral policy, while mortgage industry experts predict 30-year rates to stay in the 6% range.
The policy change was approved by a 9-3 vote from the Federal Open Market Committee (FOMC). Stephen Miran dissented in favor of a larger 50-bps cut, while Jeffrey Schmid and Austan Goolsbee favored no cut.
“Available indicators suggest that economic activity has been expanding at a moderate
pace. Job gains have slowed this year, and the unemployment rate has edged up through
September,” the FOMC said in a statement. “More recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated.”
The Fed also announced an increase to its securities holdings through purchases of Treasury bills — and, if needed, other Treasury securities — with remaining maturities of three years or less to maintain an ample level of reserves.
“I would note that, having reduced our policy rate by 75 basis points since September and 175 basis points since last September, the Fed funds rate is now within a broad range of estimates of its neutral value, and we are well positioned to wait to see how the economy evolves,” Fed Chair Jerome Powell told journalists.
According to Powell, risks to inflation remain tilted to the upside and risks to employment to the downside — a challenging balance. He added that there is no “risk-free path for policy as we navigate this tension between our employment and inflation goals.”
State of the U.S. economy
Fed officials also updated their economic projections for 2026, showing real gross domestic product (GDP) growth of 2.3%, up from a forecast of 1.8% in September. The unemployment outlook held steady at 4.4%, while the forecast for Personal Consumption Expenditure (PCE) inflation eased to 2.4%, down from 2.6%.
The increase in GDP for 2026 is due in part to the effects of the federal government shutdown, Powell said. He also cited support from fiscal policy, consumer spending and investments in artificial intelligence, which are boosting productivity.
But Powell noted that a rate hike is not part of the Fed’s base scenario. Most officials project interest rates to end 2026 in the 3.25% to 3.5% range, implying one additional 25-bps cut next year, unchanged from September’s outlook. Seven officials anticipate no further reductions, while eight expect at least two more cuts.
Inflation reached its highest level since the start of the year in September, rising 3% year over year compared to 2.9% in August, according to the U.S. Bureau of Labor Statistics. Meanwhile, the September jobs report beat estimates by creating 119,000 jobs, but the unemployment rate ticked up to 4.4%
Jeffrey Ruben, president of home lending at WSFS Bank, said the Fed has consistently emphasized that U.S. economic growth remains resilient. “We see good growth this year and into next year as well,” Ruben said.
Ruben added that while the labor market had looked “unbelievably strong” until recently, inflation has been the persistent challenge. The Fed now appears to be prioritizing labor market stability “in hopes of keeping the labor market strong and maybe fending off some of the labor losses that are being perceived in the economy,” he said.
According to Ruben, the Fed continues to navigate a “very foggy road.”
That uncertainty is reflected in the data. According to Sam Williamson, senior economist at First American, the Fed still lacks official October and November jobs numbers, but “September’s jobless rate of 4.4% already sits above the Committee’s central range for ’maximum employment,’ underscoring a softening labor market.”
What’s next?
Bank of America analysts said this week that the base case for 2026 is steady rates, with the 10-year Treasury yield holding around 4.25% by year’s end, along with U.S. gross domestic product growth of 2.4%. But they flagged a potential wildcard: a more dovish Fed leadership.
President Donald Trump is searching for a new Fed Chair to replace Jerome Powell, and Kevin Hassett, director of the White House National Economic Council, is reportedly the leading candidate.
“With a new dovish Chair, the Fed could potentially cut closer to 2%. The outlook for a lower Fed path could allow 10-year Treasury yields to drop to a 3.0%-3.5% range, down from our 4.25% forecast for year-end 2026,” Bank of America analysts wrote.
Williamson expects a gradual path back to neutral, leaving 30-year mortgage rates in the low-6% range next year, drifting down slowly rather than returning to the 3% to 4% levels of the prior cycle.
According to Williamson, as home prices cool, incomes rise faster than prices and rates ease at the margins, buying power could see “a measured, but persistent, recovery.”
Sagent CEO Geno Paluso noted that mortgage rates are down nearly a full percentage point since January, although they actually rose after Fed’s cuts in September and October.
“We must keep servicers prepared to help consumers through all possible market outcomes, from capitalizing on lower-rate refis to navigating hardships,” Paluso said.
Nash Paradise, director of sales for UMortgage, added that the recent declines in mortgage rates were tied to a combination of low liquidity and the jobs report showing more openings than anticipated.
Prior to this week’s Fed meeting, “aggregating analysis was showing two cuts in 2026, with first possibly in April and the second in the third or fourth quarter,” Paradise said.
Selma Hepp, chief ecomomist at Cotality, offered tempered expectations for improved housing affordability.
“Prices remain strong and mortgage rates are unlikely to slip under the 6% mark for a 30-year mortgage, which will keep cautious first-time homebuyers on the sidelines, and overall home-buying activity seasonally slow until we come closer to the spring home buying season,” Hepp said.
In regard to the housing market, Powell said he doesn’t expect Wednesday’s 25-bps cut in the federal funds rate to meaningfully change conditions, given today’s limited housing supply and the large number of homeowners who still carry low mortgage rates from the post-pandemic years.
“Housing is going to be a problem,” he said. “We can raise and lower interest rates, but we don’t really have the tools to address a secular, structural housing shortage.”
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