Federal Reserve May Lower Interest Rates for First Time in Nearly a Year

Washington, D.C. — The Federal Reserve is expected to lower its benchmark interest rate this week for the first time since December 2024. A rate cut may provide some relief for Americans with various loans, but it might not lead to reduced mortgage rates immediately.

The average rate for a 30-year fixed-rate mortgage has recently dropped to 6.35%, its lowest level in almost a year. This decrease comes as financial markets anticipate a Fed cut during the policymakers’ meeting on September 16-17. Meanwhile, borrowing costs for 15-year fixed-rate mortgages also dipped, falling to an average of 5.5%, down from 5.6% last week.

Experts caution that homeowners should not expect a quick reduction in mortgage rates following the central bank’s official rate cut on Thursday. Jake Krimmel, a senior economist at Realtor.com, explained, “The Fed is setting short-term interest rates. Things like the mortgage rates are longer-term interest rates.”

The Fed’s changes primarily influence short-term interest rates, which include rates on certificates of deposit and high-yield savings accounts. However, they also shape the broader lending environment. For example, adjustable-rate mortgages are particularly sensitive to the federal funds rate, as they are tied to the Secured Overnight Financing Rate.

Fixed-rate mortgages generally align with the bond market, especially the 10-year Treasury note. According to the Brookings Institute, both types of loans share similar risks and trends. Krimmel noted, “They’re maybe not pressed up against one another, but they’re sort of moving in the same direction.”

Investor attitudes and macroeconomic factors can significantly influence the yields on 10-year Treasuries, which banks use as a reference for setting mortgage rates. The yield currently stands at around 4% amidst concerns over tariffs and prospective legislation.

Experts also pointed out that lenders have been preemptively lowering rates in anticipation of the Fed’s move. Kates remarked, “A lot of the decrease that we’ve seen in the last four to six weeks has been in anticipation by some of this cut.”

Historically, banks tend to reduce their rates leading up to a Fed cut. For instance, in September 2024, mortgage rates hit a two-year low prior to a substantial 0.50 percentage point reduction by the Fed.

However, experts remind that the Fed’s interest rate policy is one of many factors impacting home loan costs. Other influences include inflation rates, job growth, consumer spending, housing demand, and international events.

Statements from Fed Chair Jerome Powell regarding future monetary policy could end up affecting the housing market more than the rate cut itself. Krimmel suggests, “That might be where there is actually some action with the bond markets or with mortgage rates.”