Fed cuts key interest rate but signals fewer reductions in 2026

The Federal Reserve of the United States reduced its benchmark interest rate by a quarter-percentage point on Wednesday — the third rate cut this year — bringing it to the lowest range since 2022.

The Fed approved the rate cut by a 9–3 vote, marking the first time in six years that three officials dissented. The move lowers the interest rate to a range of 3.50% to 3.75% in an attempt to respond to a sharper-than-expected slowdown in hiring.

The median projection from policymakers suggests a one quarter-point percentage cut for 2026 and another in 2027, maintaining a prediction from an earlier forecast.

Some Fed officials have pushed back against more rate cuts because they are worried that inflation isn’t falling toward the Fed’s 2% target. In fact, inflation has stalled, so they fear that lowering rates further could make it harder to bring prices down.

However, Federal Reserve Chair Jerome Powell defended the action, saying that inflation should head back down once the effects of tariffs had been absorbed.

"It doesn’t feel like a hot economy” poised to drive labor-market-based inflation, Powell said during the press conference on Wednesday, adding that the Fed is "well positioned" to determine the extent and timing of additional adjustments to the policy rate.

Real estate experts view the Fed’s decision as a signal to lower borrowing costs, paving the way for more commercial transactions and a clearer path toward making homeownership more attainable.

Fed officials have been operating without sufficient data because an extended government shutdown delayed key economic reports. The U.S. Labor Department is expected to release reports next week, including job numbers for October and November, as well as last month’s inflation reading, which could reshape the outlook.

Powell said they’ll review the lagging data with a somewhat “skeptical eye.” He described the situation as “challenging” and emphasized the need to wait and see how the economy evolves.

A late September jobs report, released last month, showed stronger-than-expected hiring. But unemployment edged higher to 4.4%, the highest level since 2021, while August was revised to reflect the actual job losses.

Policymakers are expecting the unemployment rate to land at "4.5% this year and edge lower thereafter," Powell said.

Four times a year, the Fed publishes what each official thinks interest rates should be in the future, based on their economic outlook and what they consider "appropriate" policy.

A majority of policymakers kept their projections unchanged from September, signaling just one quarter-rate cut next year, according to the Fed’s well-known "dot-plot" visualization, which displays the spread of the midpoint of the target range for the federal funds rate.

Back in October, Fed official Jeff Schmid voted not to cut the rate, saying at the time he would have preferred to leave the target range unchanged because, by his assessment, “the labor market is largely in balance, the economy shows continued momentum, and inflation remains too high.” Another official, Stephen Miran, who plans to leave the Fed in January, voted in both September and October for larger cuts than the Fed implemented.

This month, Schmid again voted against cutting the rate. Fed official Austan D. Goolsbee joined him in that position. Miran again wanted a larger cut.

Powell said dissents show the "tension" over the Fed's dual mandate: maximum employment and price stability.

"There seems to be a range of assessments of committee members about which of the Federal Reserve’s two mandates is more at risk: the labor market weakening further or the reacceleration of inflation, as the number of dissenters to the final decision has risen over the past three meetings, suggesting a bumpier road ahead for the Fed Chair to gain consensus," Christine Cooper, the chief U.S. economist for CoStar Group, the parent company of Homes.com, said.

Responding to a question about differing views within the committee, Powell stressed that the divide isn't simply between board members and regional bank presidents.

Powell stressed that the current debate is whether to pause rate cuts now or lower them further — either slightly or “more than a little.”

Against that backdrop, Fed officials see the inflation rate at 2.4% by the end of 2026, slightly lower than the September forecast of 2.6%. They also seem more upbeat, projecting the gross domestic product will rise to 2.3%, compared with 1.8% previously, driven largely by stronger consumer spending.

"A number of things are driving what's happening in the forecast," Powell said. "It's partly that consumer spending has held up; it's been resilient. To another degree, it is that spending on data centers and related to AI has been holding up business investment."

Professionals in the commercial real estate industry said the Fed’s decision helps draw back in sidelined equity.

“The message is clear: The tightening era is over and capital can move again,” Jonathan Canter, a partner in the real estate practice at law firm HSF Kramer, said to Homes.com in an emailed statement. “Lower rates won’t fix valuations overnight, but they will soften the pressure on office and transitional assets,” he continued.

Some told Homes.com that commercial real estate remains an interest-rate-sensitive asset class, but emphasized that capitalization rates, valuations and returns are not a function simply of interest rates alone. Others highlighted that the Fed’s latest move signals directional conviction.

“It creates additional liquidity in the system, not just for problematic refis or exit strategies, but for new developments and buoyed tenant demand-side fundamentals,” Marion Jones, the executive managing director of U.S. capital markets at Avison Young, said in a statement to Homes.com via email. “As we move into 2026, this sets the stage for more capital deployment, kickstarting development pipelines and leasing activity that reflects renewed confidence in growth,” she continued.

Meanwhile, the Bank of Canada held its policy interest rate on Wednesday.

This is the first time policymakers have gathered since the Fed ended its balance-sheet reduction, known as "quantitative tightening," after signs emerged that bank reserves were no longer abundant.

The Fed's balance sheet has shrunk from $8.97 trillion to $6.56 trillion as the central bank has been selling off a big chunk of the Treasury bonds and agency mortgage-backed securities it bought during the pandemic to keep the economy and housing afloat.

When the Fed shrinks its balance sheet, by rolling off those securities, it reduces the demand for mortgage-backed securities. That can push mortgage rates higher, making borrowing costs more expensive and cooling housing demand.

The Fed said it will continue buying short-term Treasury securities on Dec. 12, as needed, to keep reserves plentiful after determining that balances have fallen to appropriate levels.

Mortgage rates have finally eased over the past two weeks, but not low enough to get them below 6%. According to Freddie Mac, the mortgage rate average on the 30-year fixed dropped to 6.19% last week. The 30-year rate is now 50 basis points lower than it was this time last year. For context, the rate averaged 6.69% in early December 2024.

Still, December’s rate cut doesn’t guarantee that mortgage rates will continue to trend downward.

Remember that the Fed doesn’t set mortgage rates directly. Instead, it controls the short-term federal funds rate — what banks charge one another for loans. When the Fed signals changes in that rate, it can influence long-term borrowing costs, including mortgage rates.

"The housing market faces some really significant challenges," Powell said. " I don't think a 25 basis-point decline in the federal funds rate is going to make a difference for people ... We don't have the tools to address the problem."

Mortgage rates are closely linked to the 10-year Treasury yield, which moves based on global demand for bonds, inflation expectations and the economic outlook, not just decisions the Federal Reserve makes.

The 10-year Treasury yield, which fell to 4.01% ahead of the Fed’s first cut in September, was at 4.153% on Tuesday — offering little relief for homebuyers and others hoping lower rates would ease borrowing costs.

"Federal Open Market Committee meeting participants believe that inflation will continue to decline over the next year, albeit at a slow pace," Brad Case, chief residential economist at Homes.com, said after the rate announcement.

"If market participants agree with this assessment, then this decision will pave the way for slightly lower mortgage interest rates — but I wouldn’t expect anything dramatic," Case added.

"We're in the high end of the range of neutral," Powell said. "It's so happened that we have cut three times. We haven't made any decision about January, but as I said, we think we are in a position to wait and see how the economy performs."

In its outlook for next year, commercial real estate services firm Cushman & Wakefield said it expects the Fed to bring its policy rate down gradually to a “neutral” 3.0% by the second half of 2026.

“Crucially, the expiration of Chairman Powell’s term paves the way for the Trump administration to nominate a new chair who will likely be more amenable to lowering rates,” the firm said in its report.

Powell’s four-year leadership term is set to expire in May, meaning he will preside over the first three rate-setting meetings of 2026 — slotted for January, March and April. He declined to say whether he plans to stay on after his term as chair expires.

"I really want to turn this job over to whoever replaces me with the economy in really good shape," Powell said when asked what he wants his legacy to be.

Asked whether a new Fed chair would affect his current job or change his thinking, Powell simply replied, "No."

Meanwhile, President Trump’s push to reshape the Fed’s leadership adds another layer of complexity to interpreting the economic projections. In a recent interview with Politico, Trump offered a clue: When asked whether rapid rate cuts would be a litmus test for his choice to lead the Fed, he replied, “Yes.”

Last week, Trump said he had narrowed the search for Powell’s successor to a single finalist, widely believed to be longtime advisor Kevin Hassett. Yet Hassett has indicated he isn’t convinced Trump has made a final decision — despite the president’s public claim — underscoring the uncertainty surrounding the path ahead.

After the Fed's rate announcement, CNBC reported that Trump said the central bank could have “at least doubled” the cut, adding fresh pressure for deeper reductions.