Fed Cuts Interest Rates for First Time in 2025

After months of speculation, the US Federal Reserve made its first big move of 2025 on September 17, cutting interest rates by 25 basis points to a new range of 4.00%-4.25%. This marks the Fed’s first rate cut since December 2024, a shift that signals policymakers are now more worried about a cooling job market than runaway inflation.

Let’s break down with this blog what the Fed’s latest rate cut means: the key takeaways from the September FOMC meeting, Jerome Powell’s tone, why there’s growing dissent inside the Fed and what the outlook for interest rates looks like in 2025 and 2026

Key Signals from the Fed: Tone, Projections & Risk Management

Fed’s Tone & Rationale

• Chair Jerome Powell characterized the cut as a risk-management decision, aiming to address rising downside risks to employment. 
• The FOMC noted that “job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.” 
• Importantly: “downside risks to employment have risen.” That’s a shift as earlier meetings stressed on inflation first, now labor softness has grown enough to change the priority.

Summary of Economic Projections (SEP) / Dot Plot

Source: Federal Reserve

Was a 50 bps Rate Cut on the Cards?

• Stephen I. Miran’s dissent: The new Fed Governor pushed for a 50-bps cut instead of 25 bps, arguing that downside risks to growth and jobs are rising too quickly for gradual easing.
• His warning: Miran believes the Fed risks falling behind if it delays stronger action, signaling a call for more decisive policy now.
• A divided Fed: The dot plot revealed a split; six officials see no more cuts in 2025, nine expect two more cuts, and some penciled in just one cut.
• Why the division: Some policymakers still fear sticky inflation, while others are more alarmed by weakening employment.
• Current outcome: The Fed opted for a cautious middle ground, but the balance could shift quickly if upcoming data surprises

Outlook: What to Expect for Interest Rates in Rest of 2025 & 2026

Putting together the data, the Fed’s statements, and the SEP projections:

• 2025: The Fed is expecting two more rate cuts of 25 bps each (one likely in October, another in December) unless some data disappoints.
• 2026: The path becomes more cautious. The median expected funds rate by end-2026 is lower than the current one, but only one more cut is projected in many forecasts. 
• Beyond: The dot plot suggests that after 2026, rates might stabilize or change more slowly, depending greatly on inflation, global developments and labor market health. The longer-run “neutral” or appropriate rate is still projected higher than current in many participants’ views. 

Labor Market: The Weak Spot

• Payroll growth has slowed, with job creation now below the pace needed to hold unemployment steady.
• The unemployment rate has edged up, still low historically, but showing signs of rising risks.
• Strain is more visible in younger workers, minority groups, and shorter workweeks, hinting at weaker demand for labor.
• Meanwhile, PCE inflation remains above the Fed’s 2% target, forcing policymakers to balance easing enough to protect jobs without letting inflation stick.

Will Your Mortgage Rates Be Cheaper Now?

• A Fed rate cut doesn’t instantly pull down mortgage rates today. Mortgages track long-term bond yields, especially the 10-year Treasury, not just short-term Fed moves.
• If markets believe inflation will ease, those yields can fall, and that’s when mortgage interest rates drop. But if inflation stays sticky, the decline may be limited.
• Historically, it takes a few weeks to a couple of months for Fed cuts to filter meaningfully into home loan rates, and the size of the drop is usually modest at first.
• Borrowers may see some relief later in 2025, but unless inflation cools convincingly, don’t expect a dramatic fall in mortgage costs right away.

What to Watch Next: Key Dates & Data

To see how this plays out, these are critical:

• Next Fed meetings, as the market will watch what Powell & FOMC say about timing and size of cuts in the October & December Fed meetings.
• Key economic data like inflation (CPI & PCE, both headline and core); non-farm payrolls / unemployment; wage growth; consumer spending; global supply shocks (tariffs, energy, etc.).will be key to watch out for.
• Fed communications, speeches by Powell, minutes of the FOMC to see if dissent increases or if the tone shifts more dovish (or returns hawkish if inflation surprises).

The September 2025 Fed rate cut is historic in that it begins the easing cycle after months of no change. It reflects a Fed that is concerned about labor market slack, has inflation still above target, and is wary of over-tightening. But this isn’t a dramatic pivot, it’s simply cautious.

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