Despite pressure from the White House, Powell has avoided cutting interest rates so far in 2025. Now, markets expect US Fed Chair Powell to lower interest rates for the first time this year.
So far this year, the FOMC has held rates steady, citing inflationary risks from Trump tariffs. The last time the FOMC lowered rates was in December 2024, when a 50 basis point drop was announced.
Today, the macroeconomic environment seems to be different. Chair Jerome Powell’s shift in tone toward labor market risks at the Jackson Hole symposium seems evident for a rate cut ahead.
Powell’s tone in the Jackson Hole Economic Symposium last week marked a departure from his earlier emphasis on inflation persistence and low unemployment, suggesting the Fed may move preemptively to manage downside risks to the labor market.
But, will the first rate cut come in September or will it be pushed further ahead? Let’s examine.
Rate Cut Expectations
Markets expect two 25-basis-point rate cuts this year, one in September and another in December, followed by quarterly 25-basis-point decreases through 2026. The federal funds rate is currently at 4.25%-4.5%, with the possibility of lowering it to 2.75%-3.0% over time.
While most institutional reports point towards a 25bps rate cut in September, BofA Global Research remains the only major brokerage still forecasting no rate cuts this year. “If it’s a close call, August Consumer Price Index (CPI) and Producer Price Index (PPI) should also matter. We stick with our call for a hold for now. But the risks have obviously shifted meaningfully toward a cut,” says Aditya Bhave, U.S. Economist, Bank of America.
The US Federal Reserve may take its time being more aggressive, possibly waiting until the second half of 2026.
Let us look at the inflation and job market to sense what’s on the cards.
Inflation, Jobs Data
Inflation has come down considerably, but it remains sticky and not yet within the Fed’s target range.
What’s pushing Powell to go for a rate cut could be the disturbing jobs data. July payrolls added only 73,000 jobs, missing forecasts of 100,000. More damaging were the revisions: more than 250,000 positions were erased from May and June totals, leaving those months essentially flat. The unemployment rate has ticked up to 4.2%.
Going Ahead
The next FOMC meeting takes place on September 16-17. Before that, there is a series of hard economic data that can change the scenario.
The Personal Consumption Expenditures Price Index report for July will be published on August 29, 2025. Thereafter, the Employment Situation for August is scheduled to be released on September 5 and the US CPI data for August arrives on September 11.
There’s more than an 85% chance for a September rate cut. But the upcoming data on inflation and the labour market could still disrupt those plans. Watch out for some stock market volatility ahead.