Fed cuts rates by 25 bps in September to assuage markets

18 Sep 2025 , 04:22 PM

MORE DEFENSIVE THAN DOVISH

If one were to read through the language of the Fed statement, the 25-bps rate cut to the range of 4.00%-4.25%; appears more defensive than dovish. The Fed in general, and Jerome Powell in particular, wanted to rule out the possibility of higher rates triggering an economic slowdown. While Q2-GDP growth was robust at 3.3%, the contraction in Q1 resulted in sub-par growth in first half of 2025.

The August 2025 US unemployment rate was marginally up at 4.3%, but non-farm payroll additions had shrunk to a new low. The Fed felt that these 2 factors more than outweighed the risk of US CPI inflation climbing to 2.9%; well above the 2% target set by the US Fed. While markets are betting on 2 more rate cuts in 2025; Powell will remain data-driven.

WHAT WE READ FROM SEPTEMBER 2025 FOMC STATEMENT

Jerome Powell had given the first signals of a rate cut in his Jackson Hole speech; and here is what we read from the September FOMC statement.

• The vote in favour of a 25-bps rate cut was quite emphatic at 11:1, indicating that majority of the FOMC members were decisively veering towards a rate cut. The dot plot chart also indicates a strong likelihood of 2 more rate cuts before end of 2025.
• Ironically, the only vote against the 25-bps rate cut move was the vote by Stephen Miran (a Trump nominee), who voted for a 50-bps rate cut to make up for lost time. However, the majority view was still in favour of a 25-bps rate cut only.
• In its statement, the FOMC admitted that growth had moderated and job gains had slowed; despite the imports front-ending assumption of Q1. However, the statement also admitted that inflation remained elevated; creating a monetary conflict.
• Powell pointed out that the 25-bps rate cut had taken the rates closer to neutral. The expectation of 2 more rate cuts in 2025 may be due to Stephen Miran pegging 125 bps rate cut by end of 2025; a view that may have distorted the dot-plot median.
• From a longer-term perspective, the Fed is pegging the rates to stabilize at around 3% by the end of 2027. That would be another 100-125 bps from here spread over 28 months. While back-ending may be limited, a lot will depend on how the tariff story evolves.
• Trump has been pressing for sharply lower rates to boost the housing market and to reduce the cost of government debt. However, Powell has underlined that the Fed would only stick to its dual mandate of 2% inflation and near full-employment.

The big reason for the rate cut appears to be that the US economy created a million fewer jobs in the 12 months to March 2025, than originally estimated. While there could be deeper reasons; the rate cut does assuage market sentiments for now.

JOBS VERSUS INFLATION – WHAT IS THE BIGGER RISK?

That is the million-dollar question; and in Powell’s own admission, at the current juncture, jobs look like a bigger risk. Powell has also underlined that the spike in inflation was largely an outcome of the tariffs imposed by Trump. However, it was still not clear if the inflation impact would be a one-time impact or a persistent impact. In the absence of data, it would be safe to assume that the risks to growth and jobs are more serious at the current juncture than the risks to inflation. However, this view could change based on data flows.

WHAT IS THE ROAD AHEAD FOR FED RATES?

Here are the CME Fedwatch probabilities of rate moves at each upcoming Fed meet.

Fed Meet	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450
Oct-25	Nil	Nil	Nil	Nil	Nil	Nil	87.7%	12.3%	Nil
Dec-25	Nil	Nil	Nil	Nil	Nil	81.6%	17.6%	0.9%	Nil
Jun-26	Nil	4.3%	21.3%	36.3%	27.5%	9.4%	1.2%	Nil	Nil
Dec-26	8.1%	17.9%	28.6%	26.8%	14.2%	3.9%	0.5%	Nil	Nil

Data source: CME Fedwatch

For 2026, we have considered two milestone meetings of June 2026 and December 2026. Here is what we read.

• After the 25-bps rate cut in September, CME Fedwatch is assigning 87.7% probability to another 25-bps rate cut in October, and 81.6% to one more 25-bps rate cut in December. CME Fedwatch is pegging another 50-bps rate cut to 3.50%-3.75% by Dec-25.
• As of June 2026, there is an 89.4% probability of another 25-bps rate cut to the level of 3.25%-3.50% by mid-2026.
• As of December 2026, there is 81.4% probability of 1 more rate cut taking the rates to the level of 3.00%-3.25% by end of 2026.

Clearly, there is a lot of front-ended optimism being built in by the CME Fedwatch, which is normal when the undertone changes. However, the final verdict will be based on the data flows, which are fairly erratic at this juncture.