Fed Sep-25 projections hint at front-ending of rate cuts

18 Sep 2025 , 03:52 PM

MACRO PROJECTIONS STABLE, BUT RATE DIRECTION RAISES QUESTIONS

Between the macro projections of the next 4 years made in June and September, the changes are only marginal. That is because, most of the major risks like tariff risks, geopolitical risks, and spending risks were identified and factored into the downgrade of June 2025 projections. However, if one were to compare June and September, there is something that does strike you as out of logical sync. Let us look at 3 key variables; viz. GDP growth, headline PCE inflation, and unemployment.

Between 2025 and 2027, the September 2025 projections of GDP growth are better than June projections and the rate of unemployment is also lower than the June projections. However, the projections of core inflation and headline inflation are higher in September compared to June. Despite this macro mix, rate cuts are projected to be front-ended. One argument is that these visible outcomes are because rate cuts are being front-ended. We have to wait and watch!

HOW THE US MACRO STORY PANNED OUT IN LAST 4 YEARS

Here is a quick recap of the data points of last 4 years with median projections.

Variable	CY-2021	CY-2022	CY-2023	CY-2024	CY-2025 #	CY-2026 #
Real GDP Growth	+5.7%	+1.3%	+3.2%	+2.5%	+1.6%	+1.8%
Unemployment Rate	+4.2%	+3.6%	+3.8%	+4.2%	+4.5%	+4.4%
PCE Inflation	+5.8%	+6.0%	+2.8%	+2.5%	+3.0%	+2.6%
Core PCE Inflation	+4.9%	+5.2%	+3.2%	+2.8%	+3.1%	+2.6%

Data Source: US Federal Reserve (# Median Projections)

In the above table, data up to calendar year (CY) 2024 are actuals, while the data for CY2025 and CY2026 are projections. Firstly, Fed expects growth to bottom in CY2025 and then bounce back. This could happen as the tariff impact gets factored in. Fed also expects that unemployment will peak out in 2025, but will continue to remain at above 2021 levels. On the inflation front, Fed expects the headline and core inflation to taper in 2026, but it is likely to remain well above the 2% target till 2027. That will be a concern for the Fed.

SEPTEMBER 2025 FOMC PROJECTIONS (VERSUS LAST 2 QUARTERS)

To get a linear perspective, we look at September 2025 projections; compared with the earlier June 2025 and March 2025 projections.

Variable	CY-2025	CY-2026	CY-2027	Longer run
Change in real GDP (Sep-25)	1.6	1.8	1.9	1.8
Jun-2025 projection	1.4	1.6	1.8	1.8
Mar-2025 projection	1.7	1.8	1.8	1.8
Unemployment rate (Sep-25)	4.5	4.4	4.3	4.2
Jun-2025 projection	4.5	4.5	4.4	4.2
Mar-2025 projection	4.4	4.3	4.3	4.2
PCE inflation (Sep-25)	3.0	2.6	2.1	2.0
Jun-2025 projection	3.0	2.4	2.1	2.0
Mar-2025 projection	2.7	2.2	2.0	2.0
Core PCE inflation (Sep-25)	3.1	2.6	2.1
Jun-2025 projection	3.1	2.4	2.1
Mar-2025 projection	2.8	2.2	2.0
Federal funds rate (Sep-25)	3.6	3.4	3.1	3.0
Jun-2025 projection	3.9	3.6	3.4	3.0
Mar-2025 projection	3.9	3.4	3.1	3.0

 

Data Source: US Federal Reserve (CY refers to calendar year)

Here are 4 key takeaways from the table above.

• US GDP growth is likely to be an obvious casualty of tariffs but the impact is likely to be a one-time impact and growth should bottom out in 2025. In addition, Fed is also more optimistic about growth levels in September 2025 compared to June 2025.
• While the quarterly projection has kept unemployment for 2025 at its earlier projection of 4.5%, it has lowered its projection for 2026 and 2027 by 10 bps each. However, this could also be due to an underlying change in the labour market in the US.
• PCE inflation projection for CY2025 has been maintained at the previous projection of 3.0%, but the inflation projection for 2026 has been raised by 20 bps. Clearly, the Fed believes that the lag effect of tariffs will continue to impact inflation in 2026 also.
• Ironically, the FOMC is expecting aggressive rate cuts in 2025, with a front-ending bias. In fact, the 2027 rate projections are 30 bps lower than the June 2025 projections.

What would these changed projections mean for the Indian economy?

HOW WILL THE SEPTEMBER 2025 FED PROJECTIONS IMPACT INDIA INC?

For the RBI and for the Indian economy, there are some reasons to smile from the latest Fed macro projections. Firstly, the US GDP growth for 2025 has been raised from 1.4% to 1.6%. Also, the GDP growth is expected to bottom out in 2025 and pick up momentum in 2026 and 2027. Being India’s biggest export market, a bounce in US growth makes tariff talks more meaningful and also supports tech spending.

Secondly, the PCE inflation is likely to remain elevated for longer, and at a higher plane. A lot will depend on Fed policy. One thing is clear that the US will look to export its inflation and India could face the heat as part of trade negotiations. Finally, the rate cuts look likely to front-ended. That would put pressure on the RBI to also cut rates in tandem. How India protects the interests of borrowers and currency value will be the big question!