Central bank also announced end to balance sheet runoff on December 1
Updated October 29, 2025 2:29 PM ET
As expected, the Federal Reserve announced another 25-basis-point cut to the federal funds rate on Wednesday, as a softening jobs market continues to concern the central bank.
The cut is the second straight after the Fed held rates steady for the first eight months of 2025. The fed funds rate, which does not move in a one-to-one ratio with mortgage rates, is now a range between 3.75% and 4%.
The Fed also announced that it will "conclude the reduction of its aggregate securities holdings on December 1." It was expected that the central bank would end the runoff of its balance sheet before the end of the year.
Only two FOMC members voted against the decision to reduce rates by 25 basis points. Stephen Miran wanted a 50 bps cut, and Jeffrey Schmid wanted no cut at all.
Markets have anticipated this cut, which caused mortgage rates to hit their lowest levels in over a year in the last week, according to the Mortgage Bankers Association (MBA). According to the MBA, the average contract rate for a 30-year fixed-rate mortgage fell to 6.3% in the week ending October 24.
Joel Kan, MBA vice president and deputy chief economist, said the rate decline led to an increase in mortgage applications over the last week, primarily in fixed-rate refinances.
"This recent decline in rates spurred the second consecutive week of increased refinance activity, driven mainly by conventional refinance applications,” Kan said. “The ARM share of applications, which had been trending higher, dipped below 10 percent last week, as lower rates prompted more borrowers to choose fixed-rate loans.”
Ending balance sheet runoff
The move to end balance sheet runoff could impact mortgage rates more than the 25 bps cut. Barry Habib, CEO of MBS Highway, said that could help push Treasury yields lower, which would, in turn, lower mortgage rates.
“What the Fed will now start doing when they officially do this is they'll take them and they'll repurchase,” Habib said. “What they'll likely repurchase is treasuries. By repurchasing treasuries, this will put us in a position to see an additional amount of buying to the tune of about $25 billion a month in treasuries. As treasuries come down, mortgage rates will follow soon and come down.”
Barry Habib, CEO of MBS Highway, predicted mortgage rates could fall to around 5.5% in 2026, citing expected Fed rate cuts, increased Treasury purchases, and tighter mortgage spreads. He urged brokers to prepare clients by setting a “strike rate.”https://t.co/jQNJt4LyFM
— Mortgage Professional America Magazine (@MPAMagazineUS) October 21, 2025
Sam Williamson, senior economist with First American, agrees that an end to quantitative tightening (QT) could push rates lower.
“If the Fed stops runoff and resumes reinvesting in Treasuries and mortgage-backed securities (MBS), it could influence mortgage rates by increasing demand for government debt,” Williamson told Mortgage Professional America. “That added demand may push down yields on instruments like the 10-year Treasury, which mortgage rates loosely track. As a result, mortgage rates could face modest downward pressure.”
Another cut in December?
Markets are betting on another rate cut when the Fed wraps up its final meeting of 2025 on December 10. Although the odds have slipped a bit, CME FedWatch still gives an 87% chance of another 25 bps cut to end the year.
Williamson said that while he agrees, if the government shutdown continues through November, it might make it harder for the Fed to get the data needed to make that call.
“Markets are pricing in another ‘risk management cut’ at the Fed’s December meeting, bringing total easing for 2025 to 75 basis points,” Williamson said. “Policymakers have adopted a more dovish posture as the labor market softens, while October’s inflation data suggests tariffs aren’t yet driving a price surge. Those signals support a shift toward neutral policy at the year’s final meeting.
“If October data, particularly the jobs report, is delayed or not published, policymakers may choose to adopt a more cautious stance. In that scenario, the Federal Open Market Committee could opt to hold rates steady until officials have a clearer read on the economy.”
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