The September decision marks the Fed’s first rate cut of 2025, reflecting careful calibration of monetary policy amid persistent inflation and a weakening labour market.

As anticipated, the Fed opted for a quarter-point reduction while projecting two additional cuts in 2025 and one more in 2026, signaling a gradual easing cycle. A lower interest rate regime typically benefits borrowers and corporates; however, this move comes against the backdrop of slowing job growth and rising unemployment rather than easing inflationary pressures, which remain above the Fed’s 2% target.

Key Highlights

• Fed cuts rates by 25bps, first cut since December; signals two more cuts in 2025. 
• Stephen Miran dissents, advocating a 50bps cut, amid concern over weakening job market risks.

Markets responded positively, as historically, rate cuts encourage capital to shift from safe assets such as Treasuries and deposits into equities, private equity, venture capital, and emerging markets. The forward dot plot now places the median federal funds rate at 3.6% in 2025, 3.4% in 2026, and 3.1% in 2027—a notch lower than June projections.

Why Not 50bps? Powell Explains

Despite speculation, the Fed avoided a larger 50bps cut. Chair Powell clarified: “There wasn’t widespread support at all for a 50 basis point. We’ve taken outsized steps in recent years only when policy was clearly misaligned, and that is not the case today.”

Powell described the decision as “risk management”, acknowledging upside risks to inflation but increased downside risks to employment. Balancing the Fed’s dual mandate, he emphasized the need for a more neutral policy stance.

Inside the FOMC Vote

The rate cut was finalized by an 11-1 vote. Stephen Miran, a newly confirmed Trump economic adviser and Fed Governor, cast the sole dissent, favoring a 50bps reduction. Fed Governors Christopher Waller and Michelle Bowman—both Trump appointees—had earlier pushed for cuts but aligned with the 25bps compromise. Powell reiterated that with 19 Fed members but only 12 voting, altering outcomes requires broad consensus.

Also read: FM Sitharaman: GST Reforms will Boost Economy by Rs 2 Lakh Cr

Expert Reactions from India

Vishal Goenka, Co-Founder, IndiaBonds.com, noted: “The US Fed reduced benchmark interest rates by 25bps as expected with concerns on jobs slowdown but also highlighted that any inflationary effects in economic post Trump tariffs were yet to be played out. There was one dissent for 50bps cuts. The Fed is now expected to cut twice again this year by 50bps more according to forward dot plots provided by the committee members. This clearly paves the way for RBI also to move to cut rates given the slowdown in credit off take and to spur growth in the economy. Another reason is slow transmission of rates cuts so far in the banking system. This is due to the steep government bond yield curve as banks tend to borrow in the short term and lend for longer tenors for growth sectors. Addressing the steep curve by interest rate cuts and balancing of government securities issuance for short periods maturities could get the desired effect of lowering borrowing costs for companies and economy in general. Good time to be investing in bonds with expectation of further rate cuts this financial year."

Naval Kagalwala, COO & Head of Products, Shriram Wealth Ltd., added: “The FOMC cut the benchmark interest rate by 25 bps as widely anticipated. The policy statement emphasised a shift in labour market conditions, noting slower job gains, an uptick in the unemployment rate, and increased downside risks to employment, in contrast to “solid labour market conditions” in the July policy meeting. Importantly, the Fed dot plot indicated two more rate cuts in the ongoing calendar year, taking the median policy rate for 2025 to 3.6% (vs. 3.9% as per the June meeting), and for 2026 to 3.4% (vs. 3.6% previously). Besides this, projections for PCE and core PCE inflation for this year were maintained at 3% and 3.1%, respectively, while the real GDP estimate was increased to 1.6% vs. 1.4% (stated in the June meeting). In the post-policy conference, Chair Powell reiterated a meeting-by-meeting approach and stressed the need to adopt a more balanced stance towards its twin goals (the policy was said to have been skewed towards inflation for long). Immediately following the decision outcome, the DXY weakened, and Treasury yields edged lower (with buying concentrated in the longer end of the curve). However, this reversed after Chair Powell labelled the rate action a “risk-management” cut rather than a response to a potential recession ahead. From the bond market perspective, focus now shifts to the H2 supply distribution and the RBI MPC Oct policy meeting. We expect the RBI MPC to stay put on rates in the upcoming meeting, though revisions in CPI projections (following GST rate rationalisation) and tweaks to underlying assumptions will be closely watched, given the sharp depreciation in INR and ongoing geopolitical uncertainty.”

Outlook

The Fed’s decision highlights the balancing act between stubborn inflation and weakening jobs data. While the US central bank has opened the door to further cuts, global investors must remain cautious as any spike in inflation or deeper labour market stress could reshape the outlook quickly.