The Federal Reserve is meeting this week, and many expect them to lower the Federal Funds Rate. But does that automatically mean mortgage rates will go down too? Let’s break it down and clear up the confusion.

The Fed Doesn’t Directly Set Mortgage Rates

Everyone’s watching the Fed right now. Most economists believe they’ll lower the Federal Funds Rate at their mid-September meeting to help prevent a possible recession.

The CME FedWatch Tool shows that markets are almost certain a rate cut is coming in September. There's nearly a 100% chance of a cut, with about a 92% chance it will be a modest 25 basis points, and an 8% chance it could be a larger 50 basis points.

The Federal Funds Rate is basically the interest rate banks use when they lend money to each other overnight. It affects how much it costs to borrow money throughout the economy, but it’s different from mortgage rates. That said, what the Fed does with this rate can influence where mortgage rates head next.

Why Markets Already Saw This Cut Coming

Here’s something that might catch you off guard: mortgage rates usually move based on what financial markets expect the Fed will do, even before the Fed actually makes a move. In other words, if the market expects the Fed to cut rates, mortgage rates often adjust in advance to reflect that expectation.

That’s exactly what happened after the jobs reports on August 1 and September 5 came in weaker than expected. Each time, mortgage rates edged lower as financial markets became more certain a rate cut was on the horizon. Even though inflation nudged up a bit in the latest CPI report, the Fed is still widely expected to reduce rates soon.

If the Fed decides to cut rates by 25 basis points, which is what most expect, that change is probably already reflected in current mortgage rates. So, we likely won’t see a big drop.

If they decide to cut the Federal Funds Rate by 50 basis points instead, mortgage rates could fall even further than they have so far.

So, Where Do Mortgage Rates Go from Here?

The upcoming rate cut might not make a big difference on its own, but a lot of experts believe the Fed could lower the Federal Funds Rate multiple times before the year ends—assuming the economy keeps slowing down (check out the graph below).

Sam Williamson, Senior Economist at First American, puts it this way:

““For mortgage rates, investor confidence in a forthcoming rate-cutting cycle could help push borrowing costs lower in the back half of 2025, offering some relief to housing affordability and potentially helping to boost buyer demand and overall market activity.”
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— Sam Williamson, Senior Economist at First American

If there are several rate cuts, or even just the expectation that they might happen, mortgage rates could go down more in the coming months. But the key point is this all depends on how the economy shapes up. Unexpected inflation numbers or sudden changes could quickly alter the situation.

Bottom Line

Mortgage rates probably won’t fall dramatically overnight, and they won’t change exactly in step with the Fed’s actions. However, if the Fed starts lowering rates and the market anticipates this, mortgage rates could gradually move lower later this year and into 2026.

If you’ve been keeping an eye on the housing market, now’s a great time to think about