US Federal Reserve cuts rates
In a widely anticipated move, the US Federal Reserve (Fed) has opted to cut US interest rates by 25 basis points.
Members of the Federal Open Markets Committee, known as the FOMC, voted 11 to 1 in favour of reducing the fed funds target range to 4.00%-to-4.25%.
Prior to September, all five FOMC meetings in 2025 had seen the target range being kept on ice at 4.25%-to-4.5%.
A long-awaited cut
As in other parts of the world, stubborn post-pandemic inflation and aggressive monetary policy (that is, higher official interest rates, alongside reductions in central bank holdings of bonds) have made for an energy-sapping double-act in the States in recent years.
Having peaked at 7.2% in June 2022[1], US inflation (PCE) started to fall sharply until June 2023 when it moderated. There was a further small uptick in Q4 2024 and into January 2025, before price pressures started to ease once again. However, April’s ‘Liberation Day’ tariffs appear to have re-stoked the inflation embers.
Against that challenging backdrop, you have to go back to November 2022 for the last time that the federal funds range sat at a range which was at, or below, 4%[2].
Weathering a stormy build-up
The run-up to the September rate reduction was peppered with conflict, amid President Trump’s overt attempts to influence both the Fed’s mindset, as well as its personnel.
For months, Trump has been hyper-critical of Chair Jerome Powell’s ‘failure’ to usher in a renewed cycle of rate cutting. Powell has consistently held firm and stayed loyal to the Fed’s independence, citing tariff uncertainty as one of the key reasons why rates were being kept on hold by FOMC voting members.
In August, and in a dramatic turn of events, Trump also tried to oust Democrat-appointee Lisa Cook from her role as a Governor on the Board. That fight has now moved to the courts for its next instalment.
This interference and hostility from the White House – regardless of a President’s political persuasion - risks weakening the independence and stability of the Fed, a key cog in America’s giant economic engine. By default, that also risks impeding how the US economy functions and potentially lessens the appeal of US assets.
As an aside, Powell’s tenure concludes in May 2026, and few would bet their house on him remaining in seat.
Why the shift in stance?
Until September’s FOMC, voting members had been in wait-in-see mode, nervous to cut US rates in the face of two things:
- First, stubbornly high domestic inflation that higher-for-longer rates had dampened rather than quashed.
- Second, the potential for extra inflationary pressures, linked to April’s ‘Liberation Day’ tariffs, to feed through to the US economy.
As a reminder, the Fed’s dual mandate includes aiming to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In reality, US inflation (PCE) was last below 2% in February 2021. It appears that the second part of that dual mandate, as well as broader concerns about the health of the US economy, have become the Fed’s priority focus.
The deterioration of the US jobs market has been closely watched by investors, and the latest data release showed the US economy adding a paltry 22,000 new jobs month-on-month, far below analyst expectations.
In the words of the U.S. Bureau of Labor Statistics: “Total nonfarm payroll employment changed little in August (+22,000) and has shown little change since April…The unemployment rate, at 4.3 percent, also changed little in August. A job gain in health care was partially offset by losses in federal government and in mining, quarrying, and oil and gas extraction.[3]”
Fearing the much-heralded resilience of the US economy was running out of steam, the FOMC’s voting members have therefore opted to give it a leg-up in the home stretch of 2025.
Diverging global strategies
In doing so, the Fed has coincidentally followed in the footsteps of the Bank of England and the Reserve Bank of New Zealand – both of whom also cut their respective rates by 25 basis points last month.
In the UK, inflation is running at 3.8% (uncomfortably above its 2% target), at a time when the economy is creaking under the weight of national debt and high taxation. Meanwhile, in NZ, the underwhelming economic recovery was the catalyst for cutting the OCR to 3%.
Conversely, the European Central Bank opted to keep rates on hold this month. Eurozone inflation is currently behaving itself, hovering around the 2% medium-term target.
Meanwhile, Japan remains the contrarian amongst its peers. Markets currently expect the country’s central bank to raise rates in Q4 2025.
In summary
Financial markets had already priced-in the latest Fed rate cut, given the widely accepted need to catalyse a slowing US economy. With two more FOMC meetings scheduled in 2025, there is currently little at a macro level to suggest that more cuts won’t follow.
If he stays true to form, President Trump will remain vocal about wanting more cuts – partly to offset the negative impact of his tariff policy, and partly to reduce the cost of servicing the US’ growing mountain of debt.
Investors will be watching closely to see the extent to which Trump further intrudes on the Fed’s independence, as well as who wins the race to replace Powell.
The coming months will paint an important picture about the direction of travel of the world’s most influential economy.
[1] Source: https://www.federalreserve.gov/
[2]Source: https://www.federalreserve.gov/economy-at-a-glance-policy-rate.htm
[3]Source: https://www.bls.gov/news.release/empsit.nr0.htm
Photo credit: Unsplash / Chris Barbalis
