Fed anticipated to lower interest rates this year, according to Bessent, carrying a 'considerable likelihood'
Headline: Nearly Certain: Federal Reserve Expected to Cut Interest Rates in September 2025
The Federal Reserve is gearing up for a significant move, with the probability of a 25 basis point (0.25%) rate cut in September 2025 standing at almost 100%, according to the CME FedWatch Tool. This high confidence in a September cut is based on various economic indicators and market trends.
The weaker-than-expected July jobs report, which showed just 73,000 jobs created last month, has rekindled the market's hopes of a September rate cut. The labor market, while still in solid shape with a 4.2% unemployment rate, has shown signs of slowing in recent months.
Inflationary pressures, too, have been relatively modest. The consumer price index (CPI) has risen from 2.3% in April to 2.7% in June, and the Fed's preferred inflation gauge, the personal consumption expenditures (PCE) index, has risen from 2.1% in April to 2.6% in June. However, these increases have not been enough to deter the Fed from considering a rate cut.
Treasury Secretary Scott Bessent has emphasised that price increases stemming from tariffs may just be a one-time price increase. Tariffs, which are taxes on imports, are typically passed on to consumers through higher prices.
The market sees rates being substantially lower by the end of the year. By December 2025, the market sees a 45.7% chance of 75-basis-points of cuts and a 42.6% chance of 50-basis-points from the current level. This suggests a strong likelihood of continued easing toward year-end.
Federal Reserve Chair Jerome Powell has stated that the central bank is well-positioned to respond to a deterioration of economic conditions. Treasury Secretary Scott Bessent, in a special report, discussed the U.S. economy and negotiations with other nations, indicating that the Fed is expected to follow the market's lead in terms of interest rate cuts.
In summary, the CME FedWatch Tool currently indicates a 100% chance of a 25 basis point Fed rate cut in September 2025, with a smaller chance of a larger cut, and market positioning strongly expects this as a dovish shift, signaling potential rate cuts continuing into the end of 2025. Analysts view the September cut as a preemptive support move amid concerns of slowing growth.
- The potential interest rate cut by the Federal Reserve could have a significant impact on the economy, with businesses likely to respond to lower rates by increasing their investments and financing activities.
- The moderation in inflation, as indicated by the Consumer Price Index (CPI) and the personal consumption expenditures (PCE) index, alongside the weaker-than-expected job growth, could be factors contributing to the Fed's decision to lower interest rates.
- Despite the potential tariff-related price increases, the focus of the Federal Reserve seems to be on the overall health and growth of the economy, with Chair Jerome Powell stressing the Federal Reserve's readiness to respond to any economic deterioration and Treasury Secretary Scott Bessent expectating the Fed to follow the market's lead in terms of interest rate cuts.
