September 2025 FOMC Update

The Federal Reserve (Fed) lowered its target policy rate to a range of 4.00% to 4.25, the first change in policy in nine months. The change has been anticipated by markets since the release of weaker than expected payroll data in early August. There was one notable dissention among Fed voters with newly appointed Governor Stephen Miran opting for a cut of 0.5%.

Current Conditions

GDP moderated in the first half of 2025, and the Fed projects a marginal increase in growth in the coming quarters. Chair Powell highlighted the ongoing challenges of slow growth and high inflation. The Fed now sees the balance of these risks as having shifted toward weaker growth given recent employment trends and a base-case assumption that inflation could be short-lived.

Forward Guidance

The Fed projects lower interest rates are appropriate given the shift in risks. The median Fed participant projects a short-term rate of 3.6% by the end of 2025, which would imply rates cuts at each of the Fed’s next two meetings. The range of Fed rate projections for 2025 remains unusually wide with one voter calling for 2.8% and one voter expecting a rate hike back to 4.3% will be needed.

Policy/Market Reaction

Markets expected the rate reduction but may have been disappointed by a cautious stance by Chair Powell. Powell characterized the move as an “insurance cut” and is keeping an eye out for risks of a persistent increase in inflation. Bond yields were marginally higher following yesterday’s announcement.