Fed chair: 'I don't know if a 25-basis-point decline in the federal funds rate is going to make much of a difference for people'
As anticipated, the Federal Reserve lowered its Fed funds rate by 25 basis points on Wednesday, citing a continued softening of the job market as a greater concern than elevated inflation.
However, when discussing the cut with the media afterwards, Federal Reserve chair Jerome Powell wasn’t convinced that the central bank’s rate cut would be enough to help the housing market.
In fact, Powell said he felt the problem wasn’t something that the Federal Reserve could fix by raising or lowering the overnight rate.
“The housing market faces some really significant challenges,” Powell said. “I don’t know if a 25-basis-point decline in the federal funds rate is going to make much of a difference for people. Housing supply is low. Many people have very low-rate mortgages from the pandemic period. It’s expensive for them to move, and we’re a ways away from that changing.”
Powell said one of the biggest problems facing the housing market was the lack of housing construction.
“We haven’t built enough housing in the country for a long time,” Powell said. “A lot of estimates say we just need more housing of different kinds. We can raise and lower interest rates, but we don’t have the tools to address a structural housing shortage.”
Ways the Fed can help
While Powell shifted the blame for some of the housing struggles to homebuilders, a housing analyst believes the Fed can take steps to help.
Eric Hagen (pictured top) is the managing director and mortgage and specialty finance analyst at BTIG. He wasn’t surprised by the central bank’s cut and thinks that if they get serious about quantitative easing (QE), rates could really start to drop.
“We feel like if they turn on QE again, that would be materially positive for the mortgage market, because it would just tighten spreads in the secondary market and lower mortgage rates,” Hagen told Mortgage Professional America. “The administration has already done something to that effect. There were some rumors at the end of the summer that there was going to be a housing emergency declared by Trump.
“And a lot of the speculation surrounding that was that they would direct the GSEs or the Fed to buy agency MBS in the secondary market to lower mortgage rates. Some of that speculation has already been carried out in the secondary market.”
Powell announced the Fed would make reserve management purchases of $40 billion in the first month, and an elevated amount in future months, to “alleviate expected near-term pressures in money markets.” However, Hagen noted that much of that would be on shorter-term Treasuries, meaning it wouldn’t have the same impact as true QE.
“If they were to go the extra step and actually do quantitative easing, we feel like spreads would definitely tighten more,” Hagen said. “We think they're more likely to do a ‘QE light’ kind of framework where they buy treasury bills as opposed to longer-dated securities. QE is technically a longer-dated Treasury exercise. But in the normal course of targeting an interest rate, the Fed always bought Treasury bills, and we totally expect them to come back into the market and maybe do it again.”
Converting to SOFR
Another topic that has come up in the discussion of future Federal Reserve chair candidates is a move from the Fed funds rate to SOFR, or the Secured Overnight Financing Rate. Hagen could see the Fed making that move in 2026, especially after Powell’s term is completed.
“We feel like the Fed is probably going to move off of targeting Fed funds as its primary policy rate,” he said. “Going forward, it could convert to SOFR being the policy rate, which we think would be positive for the market. Generally, there's just a lot of liquidity behind this. There is a lot more transparency, and it's an easier rate for the Fed to target.”
As the Fed prepares its last rate decision of 2025, expectations point to another modest cut while scrutiny on policy intensifies. Long term bond markets remain the key driver for mortgage rates. More developments to come.https://t.co/fNbMuprI8f
— Mortgage Professional America Magazine (@MPAMagazineUS) December 10, 2025
Hagen said that, in many ways, it would be much easier for the Fed to control the SOFR rate than the Fed funds rate and that it would provide more transparency to the process overall.
“The Fed funds rate is technically an unsecured lending rate,” Hagen said. “It's the rate that banks lend to each other on an overnight unsecured basis, and so that in itself creates a lack of transparency. You don't know which banks are trading. You just don't see it. And since SOFR has become more of a focus of short-term money market rates, the volume for trading in Fed funds has dried up.
“The Fed has the tools to directly control SOFR. They can go into the market and effectively set the rate, and they use the Repo backstop at the Fed to inject liquidity and withdraw liquidity. The Fed is totally focused on transparency and taking a lot of volatility out of the market. They see the noise in the Repo market at the end of the quarter and at the end of the year and think, ‘Is this avoidable?’ And it should largely be avoidable if they switch to SOFR.”
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