Fast reading
- Fed cuts rates by 25bps, lowering target range to 4-4.25%.
- Move comes amidst signs of a cooling US labour market and controlled inflation.
- Updated economic projections see two more quarter-point cuts this year, and one apiece in 2026 and 27.
The Federal Reserve’s Federal Open Market Committee (FOMC) met this week against a backdrop of heightened economic uncertainty and mounting political pressure. In a long-awaited shift, policymakers on Wednesday announced a 25bps interest rate cut – the first since December 2024 – bringing an end to a pause in monetary policy moves1. The decision takes the federal funds target range down to 4-4.25% – its lowest level since 2022.
The US Federal Reserve’s (the Fed) updated projections support a path of gradual cuts through year-end (as shown in Figure 1, below), with policymakers updating their economic projections for two additional decreases this year and one apiece in 2026 and 27. The cut in interest rates comes on the heels of new reports indicating a market slowdown in US hiring, while tariffs continue to exert only limited pressure on inflation.
Under pressure
This week’s meeting was notable not just for its policy move but also for the tense political environment surrounding the central bank in the lead up. US President Donald Trump’s attempt to remove Federal Reserve Governor Lisa Cook – a decision which was blocked by a court ruling this week – and his repeated demands for Fed Chair Jerome Powell to endorse a more aggressive rate-cutting regime have loomed large in recent weeks, exposing the Fed’s potential vulnerability to short-term political interests.
In a news conference following the announcement, Powell said the decision reflects a need to keep risks to the economy in line, describing it as a “risk management” cut.
Figure 1: Target rate probabilities
Stuck between the dots and a hard place
“The decision initially fuelled a rally in the US treasury market and a sell-off in the US dollar which briefly took the euro to a new four-year high. However, these moves were both short-lived following Powell’s cut description, which clashed with US treasury and dollar valuations as both had been pricing in a more aggressive Fed easing path” explains John Sidawi, Senior Portfolio Manager, International Fixed Income.
“The jury is still out on this tug of war between US growth and inflation. The impact of global tariffs has yet to be fully realised and the question of whether fiscal impulses will be sufficient to offset the drag of import taxes remains a large unknown. Much to the dismay of the FX and interest rate market the direction of US monetary policy remains very clear, but it was the journey that both markets mispriced yesterday,” Sidawi adds.
The jury is still out on this tug of war between US growth and inflation.
Sue Hill, Head of Government Liquidity Solutions, Federated Hermes notes that, while there was potential for drama, the FOMC meeting delivered few surprises: “As rate cuts go, this one was fairly painless.”
“The market didn’t quite know how to interpret everything – with initial swings in both the bond and equity markets before the day ended largely unchanged. I still expect two quarter-point cuts in October and December, targeting 3.50–3.75% by year-end and a terminal rate around 3%,” Hill adds.
Elsewhere…
The Bank of England (BoE) announced on Thursday it would hold interest rates steady at 4% – following August’s 25bps cut – as the central bank continues to tame above-target inflation. Figures released on Wednesday put UK inflation at 3.8% in the year to August.2
“There were no surprises from the Bank. Rate cuts need be “gradual and careful”, suggesting that the November cut is still 50/50. From here a tricky balance of monetary and fiscal policy is needed to revive the country from the current subdued growth,” explains Filippo Alloatti, Head of Financials, Federated Hermes.
For more, read our H2 credit outlook.
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1 Federal Reserve Bank of New York, as at 17 September 2025.
2 Office for National Statistics, as at 17 September 2025.
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