The Federal Reserve delivered its third consecutive interest rate cut of 2024 on Wednesday, December 18, lowering its benchmark federal funds rate by 25 basis points to a range of 4.25% to 4.50%. While borrowers might expect this move to immediately translate into lower mortgage rates, the reality is more complex—mortgage rates have remained stubbornly elevated around 6.6% for 30-year fixed loans, creating what experts call a 'higher-for-longer' environment for housing costs.
How the Fed's Hawkish Cut Unfolded: Markets React with Historic Plunge
In what analysts are calling a 'hawkish cut,' the Federal Reserve reduced rates while simultaneously projecting fewer rate cuts for 2025 than previously expected. The central bank now anticipates only two rate reductions next year, down from the four cuts forecast in September. This cautious approach sent shockwaves through financial markets, with the Dow Jones Industrial Average plummeting 1,123 points—a 2.58% decline—marking the index's tenth consecutive losing session and its worst streak since 1974.
'The Fed's admitted uncertainty as to monetary policy actions in 2025, combined with the expectation of only two cuts rather than four in 2025 amplified investor uncertainty and concern,' said Sam Stovall, chief investment strategist at CFRA Research. The market reaction underscores the delicate balance the Fed is trying to strike between supporting economic growth and containing inflation that remains just above the central bank's 2% target.
Timeline: The 2024 Rate Cut Journey from September to December
The December rate cut represents the culmination of a strategic shift that began in September. Here's how the Fed's monetary policy evolved throughout 2024:
- September 2024: The Fed initiated its rate-cutting cycle with a substantial 50 basis point reduction, marking the first cut in four years. Mortgage rates responded by falling to 6.08%, their lowest level in two years.
- November 2024: The central bank delivered a more modest 25 basis point cut, continuing its easing cycle but at a slower pace.
- December 18, 2024: The third consecutive cut of 25 basis points brought the total reduction since September to a full percentage point. However, this 'hawkish cut' came with reduced expectations for 2025, signaling a more cautious path forward.
Why Mortgage Rates Aren't Following the Fed's Lead: Expert Analysis
Despite three Fed rate cuts totaling a full percentage point, mortgage rates have proven surprisingly resilient. The average rate on a 30-year fixed mortgage was 6.6% for the week ending December 12, according to Freddie Mac data—significantly higher than September's low of 6.08% and well above what many economists had predicted for year-end.
'Mortgage rates will modestly trend lower. Given that mortgage rates have stayed above 6% for more than two years, consumers are getting used to the new normal,' said Lawrence Yun, chief economist at the National Association of Realtors. 'Jobs and inventory will drive home sales.'
The disconnect stems from how mortgage rates are determined. Unlike credit cards or home equity lines of credit that closely track the federal funds rate, mortgage rates primarily follow the 10-year Treasury yield, which has climbed in recent weeks due to stronger-than-expected economic data. 'Longer rates have actually gone up quite a bit since September,' Fed Chair Jerome Powell acknowledged during his press conference. 'Those are the things that drive, for example, mortgage rates more than short-term rates do.'
Where Things Stand Now: A Housing Market in Limbo
The current housing market presents a paradox of persistent challenges. 'Activity in the housing sector has been weak,' Powell stated bluntly during Wednesday's press conference. Existing home sales through October 2024 totaled just 3.96 million, putting this year on track for the slowest pace since 1995.
Several factors are contributing to this stagnation. According to the Consumer Financial Protection Bureau, nearly 60% of the 50.8 million active mortgages have interest rates below 4%, creating what economists call the 'lock-in effect.' Homeowners with these ultra-low rates are reluctant to sell and take on new mortgages at current rates around 6.6%. Meanwhile, prospective buyers face both high borrowing costs and record-high home prices, with the median sales price reaching $407,200 in October—the 16th consecutive month of year-over-year gains.
What Happens Next: The Road Ahead for Mortgage Rates in 2025
Looking forward, experts predict a gradual rather than dramatic improvement in mortgage rate conditions. 'A slower pace of interest rate cuts in 2025 means borrowers will have to continue doing the heavy lifting of aggressive debt repayment,' warned Greg McBride, chief financial analyst at Bankrate. 'Borrowing rates for variable rate debts such as credit cards and home equity lines of credit are high and won't come down fast enough to provide meaningful relief.'
The Fed's reduced expectations for 2025—just two cuts instead of four—reflect concerns about inflation's stubbornness. Recent months have seen inflation progress stall, with the Personal Consumption Expenditures price index (the Fed's preferred gauge) expected to show an acceleration when new data is released Friday. 'We have been moving sideways,' Powell admitted, noting that inflation has 'once again underperformed relative to expectations.'
The Bottom Line: Key Points for Homebuyers and Investors
As 2024 draws to a close, several key takeaways emerge from the Fed's latest actions:
- Don't expect immediate mortgage rate relief: The Fed's rate cuts don't directly translate to lower mortgage rates, which follow longer-term Treasury yields.
- Higher-for-longer may be the new normal: With the Fed projecting only two cuts in 2025, borrowing costs are likely to remain elevated through much of next year.
- Housing market recovery will be gradual: The combination of high prices, limited inventory, and elevated rates suggests a slow normalization rather than a rapid rebound.
- Watch economic data, not just Fed announcements: Mortgage rates respond to broader economic trends, particularly inflation reports and employment data.
- Consider your personal timeline: Rather than trying to time the market perfectly, focus on what makes sense for your financial situation and housing needs.
While the Fed's December rate cut represents continued progress toward more accommodative monetary policy, its impact on the housing market remains muted by broader economic forces. For now, both homebuyers and homeowners must navigate a landscape where mortgage rates have proven more resilient than expected, creating challenges—and opportunities—in equal measure as we head into 2025.
