FOMC: Easing under constraints

As widely anticipated, the 16-17 September FOMC meeting ended with the Fed reducing its target rate by 25bp, while reasserting its independence. While the marked slowdown in payroll growth prompted the Fed to cut the policy rate for the first time in 2025, it reiterated that future decisions would remain data-dependent. In our view, the downside risks to the labour market cast little doubt about the continuation of monetary easing. We anticipate two further 25bp cuts in October and December, bringing the target range to +3.5% – +3.75%, which is in line with market expectations. However, easing is likely to remain limited in terms of both timing and scope, given the actual and expected rebound in inflation.

No surprise

The 16-17 September FOMC meeting resulted in the unanimously expected cut (-25bp) in the target rate to +4.0% – +4.25%. The Fed lowers its policy rate for the first time in 2025, following a cumulative 100bp reduction between September and December 2024. The sharp deterioration in the labour market and the downside risks surrounding its outlook caused the Fed to implement a risk management approach and prioritize this side of the dual mandate over the upside risks to inflation[1]. Unlike the previous FOMC meeting (at the end of July), which saw two dissents (Governors M. Bowman and C. Waller, who favored a cut), this one saw a single, but notable one, from S. Miran, the newly confirmed caretaker governor, who voted in favor of a 50bp cut.

Inflation risk and labour market conditions are not aligned

With regard to inflation, the situation is far different from that of a year ago (when the Fed cut the target rate by 50bp in response to a poor job report). This time around, the Fed is opting to cut rates despite inflation rising without having even returned to target. CPI inflation reached 2.9% y/y in August (compared with 2.5% a year ago) and 3.1% according to the core index (3.2% a year earlier) and is expected to keep rising, peaking at 3.6% for both the CPI and the core index, which we anticipate in May 2026. At the same time, however, the employment developments are more concerning today (nonfarm payrolls at +64k on average for the six months to August 2025, compared with +116k in August 2024, subsequently revised to +132k). The September 2025 statement notably introduced a new reference to ‘downside risks’ in this area, which was not present during the previous rate-cutting phase in 2024.

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