The Federal Reserve is famously “data dependent” in its efforts to shape effective U.S. monetary policy that simultaneously steers and is steered by economic conditions on the ground.
Every six weeks or so, U.S. central bankers convene in Washington, D.C., to sift through the latest pan of economic indicators, from jobless claims and consumer price trends to business capital expenditures and bank deposit levels.
Those officials voted to reduce the federal funds rate by 0.25% on Wednesday for the third consecutive meeting under unique circumstances, with key government data reports missing from their folders on account of the six-week government shutdown.
That data includes official October and November employment summaries and numerous measures of price inflation impacting business and consumers across the economy. The Fed has a dual mandate to maintain maximum employment and price stability.
David Akre, who co-founded New York Mortgage Trust and now heads the non-qualifying mortgage (non-QM) loan trading platform Whole Loan Capital, says month-to-month decisions by the Fed are less important to housing’s health than other looming changes.
“Rates are basically stuck for now,” Akre said, “so what the Fed does won’t matter for mortgage rates as much as what happens next for Fannie and Freddie,” the government-sponsored mortgage investors that President Donald Trump seeks to sell shares in through a public offering. “That news could come at any time,” he said, “likely in a 3 a.m. tweet.”
However, by lowering rates in December without a complete dossier of the timeliest government data, Fed policymakers have wagered that recent months of what they observe as negative job growth presents a greater risk to the economy than reaccelerating inflation.
Now at a target range of 3.5% to 3.75%, the rate at which banks can borrow against reserves they have stashed at regional Federal Home Loan Banks is “certainly not strongly restrictive,” Fed Chair Jerome Powell told reporters Wednesday at a press conference concluding December’s Federal Open Market Committee meeting.
Nevertheless, the third consecutive rate reduction “reinforces the overall strength of the economy, which fosters a supportive environment for mortgages and refinance activity,” said Joseph Panebianco, president and CEO of AnnieMac Mortgage. Panebianco told Scotsman Guide that “it is critical that lenders continue to monitor reporting and data, including employment, interest rates and inflation.”
End of a cutting cycle?
“What we’re watching right now,” Charlie Wise, head of global research and consulting for TransUnion, told Scotsman Guide, “are what other economic data are coming in that might support further rate cuts over the next six to 12 months. I think that’s really what people are looking out for and what’s going to drive the 10-year Treasury.”
The quarterly Summary of Economic Projections (SEP), released concurrently with Wednesday’s rate-cut announcement, showed the median outlook among Federal Reserve policymakers calls for just one quarter-point rate cut in 2026, teeing up contentious meetings ahead for whoever Trump nominates to replace Powell in May.
Having lowered its benchmark borrowing rate by 0.75% since September, and 1.75% since September 2024, the central bank seems to be approaching a rate-cut pause. This trend prompted Nick Timiraos of The Wall Street Journal, citing similar rate-cut patterns from the 1990s, to ask Powell whether it is “a foregone conclusion the next move in rates is down.”
“I don’t think that a rate hike is anybody’s base case at this point,” replied Powell, “and I’m not hearing that.” Wednesday’s decision produced three formal dissents — one more than October’s decision — and four “soft dissents,” with policymakers split on “holding here, cutting a little or cutting more than a little,” according to Powell.
The dissents show “just how divided the committee is with respect to future rate cuts,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association, in a statement shared with Scotsman Guide.
Fratantoni forecasts mortgage rates will “stay within a fairly narrow range over the next few years,” an outcome that “becomes more likely as the Fed reaches the end of their cutting cycle next year.” Consensus among mortgage- and housing-related economists is that mortgage rates will remain near current levels in the low-6% range through 2026.
Lisa Sturtevant, chief economist of multiple-listing service Bright MLS, remarked to Scotsman Guide that unintended consequences for mortgage lending and home sales could emerge as markets try to digest policymakers’ diverging views.
“In addition,” Sturtevant said, there are “concerns about the potential for inflation to reassert itself, which could also push mortgage rates higher.”
Mortgage rates are benchmarked to yields on 10-year U.S. Treasury bonds, which are roughly 50 basis points higher than when the Fed began cutting rates from a peak of around 5.4% in September of 2024. As longer-dated bonds, their yields fluctuate based on investor expectations for broader economic stability and inflation.
Stable prices vs. maximum employment
“We feel like we have made progress this year on non-tariff-related inflation,” Powell said Wednesday, which the central bank pegs in the low-2% range. Headline consumer price index and personal consumption expenditures (PCE) price index readings, two common measures of inflation, showed respective annual growth of 3% and 2.8% in September.
The updated SEP showed median projections of PCE inflation, the Federal Reserve’s preferred inflation gauge, declining to 2.4% by the end of 2026. Baseline forecasts for gross economic output have grown to 2.3% for next year, largely driven by resilient consumer spending and business investment in AI data centers, said Powell.
Meanwhile, internal projections at the central bank show negative job growth in recent months, worse than official data suggests, due to a “systematic overcount” of about 60,000 jobs monthly that Powell attributes to the difficulty estimating real-time job growth.
As demand for workers has fallen through the summer and fall, falling labor supply due to Trump administration immigration policies has caused the unemployment rate to only increase slightly, to 4.4% in September from 4.1% in June, latest government data show.
Powell confirmed that for the past five or six years — predating the introduction of generative AI — the U.S. economy has experienced a “positive productivity shock” marked by 2% annual growth in per-worker productivity growth, possibly due to the COVID-19 pandemic pushing many companies to “do more things with computers to replace people.”
Projections show the Fed expects the unemployment rate to peak at 4.5% by the end of 2025 and decline through 2026. This suggests that “maximum employment” remains tough to gauge as AI investment assumes an increasingly higher share of economic growth.
“It’s a little curious,” said Powell, calling the impact of artificial intelligence on the declining demand for workers “not a big part of the story yet.”
Companies have cited AI in announcements of layoffs and hiring freezes, but unemployment insurance claims and job finding rates are largely stable and unchanged. “It’s certainly not showing up in layoffs yet,” said Powell.
