On December 10, 2025, the Federal Reserve once again trimmed the overnight federal funds rate, reducing the target range by 0.25% to 3.50%–3.75%, the third consecutive cut this year. The move shows policymakers are responding to slowing economic momentum, particularly in the job market, while inflation continues drifting back toward their 2% goal.
The rate cut wasn’t without some push back from voting members. 9 out of the 12 voted for the cut. Out of the 3 descents 2 didn’t want the cut as they were concerned out inflation, 1 wanted a .5% cut.
But here’s the headline most homebuyers and sellers care about: this rate cut has not translated into significantly lower mortgage rates. The 30 Fixed Rate Mortgage has been a tight range for the past 3 months, regardless on the recent Fed cuts. Let’s break down why and what’s likely ahead in 2026.
What’s Driving the Fed’s Decision
1. Economic Conditions: Slow Jobs Growth & Rising Unemployment
Recent government data shows the U.S. unemployment rate climbed to 4.6%, its highest level in years, a sign of a softening labor market.
That shift matters to Fed policymakers because their mandate is not only about inflation but also maximum employment. With job growth substantially slowing and layoffs in key sectors, the Fed has judged that slightly easier monetary policy may help stabilize hiring.
2. Inflation Is Cooling but Still Above Target
Inflation, as measured by the Consumer Price Index (CPI), came in at around 2.7% year-over-year, with core CPI at about 2.6%, the lowest readings in some time.
While that’s encouraging progress toward the Fed’s 2% inflation objective, it’s still above target, meaning the Fed can’t ease aggressively without risking inflation pressures re-emerging.
So Why Didn’t Mortgage Rates Fall…?
Even though the Fed cut the federal funds rate the benchmark for overnight loans between banks, long-term mortgage rates don’t move in perfect lockstep with it. Here’s why:
- Mortgage rates are anchored to the 10-year Treasury yield, which reflects investor expectations for inflation and growth far into the future.
- Markets are pricing in only gradual rate cuts, with traders expecting perhaps one or two quarter point reductions in 2026, not a dramatic drop.
- Economic uncertainty and weak data (like uneven job creation, delayed inflation reports after the government shutdown) are keeping Treasury yields elevated relative to short term policy rates.
In short, a lower Fed Funds rate doesn’t automatically lower mortgages when long term yields and inflation expectations aren’t falling sharply.
What Powell and the Fed Are Signaling for 2026
At the December meeting, Fed Chair Jerome Powell and his colleagues emphasized they’re acting cautiously balancing between cooling inflation and a weakening jobs picture. They also made it clear they will continue to evaluate new incoming data on a meeting-by-meeting basis. They perceive the rate is now at the high range of neutral. Not as restrictive as it has been.
Key takeaways from the Fed’s guidance and projections:
Moderate rate cuts likely in 2026 – The median projection among policymakers anticipates potentially one more rate cut next year, but they’re not forecasting aggressive easing.
Inflation may gradually decline further toward 2%, but it won’t plunge immediately.
Growth expectations for 2026 are slightly stronger than earlier projections suggesting the Fed sees room for modest economic expansion if conditions remain stable.
Powell has reiterated there’s no ‘risk-free’ path forward, meaning every policy choice involves trade offs between inflation and employment outcomes.
What This Means for Buyers & Sellers
For Homebuyers:
- Don’t count on an immediate drop to “easy” mortgage rates just because the Fed cut a short term interest rate.
- Locking in mortgage rates strategically, especially if you see strong personal buying power and favorable terms remains wise.
- If rates moderate modestly in 2026, buyers could see incremental savings on monthly payments, but it won’t be dramatic.
For Homeowners & Sellers:
- A more balanced economy, cooler inflation + rising unemployment, can temper home price volatility.
- Buyers on the fence may re-enter the market if mortgages become more affordable, even gradually.
For Investors:
- Watch the 10-year Treasury yield and forward rate curves, they’re better predictors of mortgage rate direction than Fed policy alone.
- Many market models still price at least one or two rate reductions through next year.
The Fed cut the overnight rate again in December because slower job gains and moderating inflation gave policymakers room to ease. But that doesn’t automatically shift mortgage rates lower, the market dynamics for housing borrowing costs are broader and tied to long term yields and economic expectations.
Looking into 2026, the Fed’s stance is cautious and data dependent, suggesting gradual improvements rather than dramatic shifts in rates. For real estate consumers, that means patience, smart timing, and forward thinking will be key as the economy and housing market continue to evolve.
If you are in the Los Angeles area, and have any questions or real estate sales or financing needs, feel free to contact me
Ron Henderson GRI, SRES, SFR, RECS, CIAS, CREN, GREEN
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – Southland Regional Association of Realtors (2025)
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
Chairman – OutWest Marketing Meeting (Real Estate Education)
DRE #00905793 NMLS #310358
www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth
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