Fed cuts rates as labor market softens, inflation persists
Summary
Last week, markets reached new highs despite growing concerns over a potential government shutdown as lawmakers remained at odds on federal budget negotiations. The Federal Reserve delivered a widely anticipated 25 basis point (bp) rate cut, its first of the year, reflecting a slower labor market and persistent inflation risks. Stephen Miran’s confirmation to the Fed Board added to policy discussions. As fiscal and monetary policy debates intensified, the outlook remained fluid, with economic data releases and political developments setting a volatile tone for the week ahead.
The S&P 500 rose 1.2% for the week, reaching a record high with a 14.4% year-to-date return. The 10-year Treasury yield climbed 9 bps to 4.14% on Friday.
Fed delivers expected 25 basis point cut
The Federal Open Market Committee (FOMC) convened on September 16-17, 2025, and delivered a widely anticipated 25 bp rate cut, bringing the policy rate down to 4.00%-4.25%. This marks the first rate reduction of the year, prompted mainly by a notable slowdown in labor market growth and rising downside risks to employment. While inflation remains elevated, CPI inflation reached 2.9% year-over-year in August and is expected to climb further, the Fed prioritized managing labor market risks over inflation concerns. Chair Powell emphasized the “risk management” approach and signaled the likelihood of consecutive future cuts, with projections pointing to two additional rate reductions by yearend and further easing in 2026. The FOMC’s internal projections, however, reveal some divergence in outlook, with committee members split on the pace and extent of future easing. Powell and the committee flagged that further decisions would be data-dependent, and the balance of risks has shifted toward supporting employment, even as inflation pressures persist.
Mixed economic signals
The coming week’s economic calendar is anchored by the release of flash Purchasing Managers’ Index (PMI) survey data, offering an early look at economic momentum for September. Markets will watch closely for updates on Core Personal Consumption Expenditures (PCE) inflation, critical for gauging the path of monetary policy, alongside revised GDP numbers, durable goods orders, and home sales data. Recent PMI data highlighted strong growth in India and the U.S., with more moderate but improving conditions in the UK, Japan, and parts of Europe. Key questions linger over whether the recent boost to global manufacturing, partly driven by tariff-related front-loading, will persist. Market participants will scrutinize U.S. data, especially around prices and labor, for evidence of easing inflation and the effects of the recent rate cut. As policy debates continue, markets will remain sensitive to developments in fiscal negotiations, inflation, and the pace of economic recovery, setting the stage for volatility and shifts in sentiment throughout the week.
The week ahead
The coming week’s economic calendar will include releases on PMI, PCE inflation, GDP, and housing data. The market will watch for signs of inflation and labor trends, while also paying close attention to ongoing budget negotiations in Congress and the possibility of a government shutdown.
U.S. Treasuries
U.S. Treasuries indicate yields for on-the-run U.S. Treasury bills, notes, and bonds, which are typically the most recently auctioned and most liquid issue with a maturity closest to the stated tenor. These are commonly used for pricing fixed-rate debt at origination and for calculating yield maintenance.
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SOFR swap rate (annual/annual)
SOFR swap rate is a swap where a counterparty pays a fixed-rate on an annual, Act/360 basis and receives SOFR, reset daily and paid annually on an Act/360 basis. This rate is a common benchmark for pricing fixed-rate CMBS and other fixed-rate loans.
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Disclaimers
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