What is the magnitude of the Federal Reserve's interest rate reduction anticipated this autumn?
Fed Expected to Cut Interest Rates by 25 Basis Points in September 2025
The Federal Reserve (Fed) is expected to lower interest rates by 25 basis points (0.25%) at its upcoming meeting on September 17, 2025, according to the CME FedWatch tool. The probability of this move is over 90%.
The decision comes as the unemployment rate, according to the FOMC's policy statement, remains low but labor market conditions are weakening. The unemployment rate has risen from 4.1% in June to 4.2%, and the July jobs report came in much weaker than expected. Outsize cuts to the previous two months' worth of jobs data were observed, and the downward revisions in the job report reveal business demand for labor is slowing, according to Jeffrey Roach, chief economist for LPL Financial.
The weakening labor market has raised expectations for the Fed to resume cutting interest rates sooner rather than later. Some economists and analysts are warning there is a growing risk the Fed may need to cut by 50 basis points (0.5%) later in the year, especially if the labor market deteriorates further.
Economic and Market Impacts
Lower interest rates generally reduce borrowing costs, encouraging consumer spending and business investment, which can help support economic growth amid signs of slowing job creation. However, rate cuts also indicate concerns about economic weakness or inflation easing and sometimes precede downturns.
Historically, the stock market often reacts positively to initial Fed rate cuts, potentially boosting equity valuations as financing costs fall and growth expectations improve. Yet, previous rate cuts during crises have sometimes coincided with market declines, so context matters.
Lower rates can reduce yields on safe fixed-income investments like bonds and savings accounts, potentially pushing retirees to seek higher returns in riskier assets such as stocks or real estate. At the same time, an improving economy supported by rate cuts may help retirement portfolios grow, though caution is warranted if cuts signal economic trouble ahead.
Looking Ahead
Tactical investors looking for broader exposure should consider exchange-traded funds (ETFs) that could benefit from rate cuts later this year. The main concern for the Fed is a "somewhat elevated" level of inflation. CME FedWatch is showing majority odds for a quarter-point rate cut at the FOMC's December 9-10 meeting, which would bring the fed funds rate to a range of 3.00 to 3.25%.
As always, it's important for investors to carefully consider their risk tolerance and financial goals when making investment decisions.
[1] CME FedWatch: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html [2] Wall Street Journal: https://www.wsj.com/articles/fed-is-expected-to-cut-rates-by-25-basis-points-in-september-11568456991 [3] Bloomberg: https://www.bloomberg.com/news/articles/2021-08-06/fed-said-to-see-risk-of-bigger-rate-cuts-as-economy-softens [4] Investopedia: https://www.investopedia.com/terms/f/fedfundsrate.asp [5] Forbes: https://www.forbes.com/sites/nathanielparishflannery/2021/06/15/the-feds-rate-hike-is-a-dangerous-bet-on-inflation-and-growth/?sh=63b1c44261e6
- With the Federal Reserve expected to lower interest rates by 25 basis points, investors may consider escalating their financial activities such as investing in exchange-traded funds to capitalize on the potentially positive impacts on consumer spending and business investments.
- As concerns about economic weakness or inflation easing rise, some investors might find themselves reviewing their investment strategies, potentially diversifying into riskier assets like stocks or real estate as yields on safe fixed-income investments decrease.
