FOMC lowers policy rate by 25 basis points as labor market weakness builds
Summary
On Wednesday, September 17, 2025, the Federal Open Market Committee (FOMC) voted to cut the Fed Funds rate to a target range of 4.00%-4.25%. The first cut of 2025 follows months of political pressure on Chair Powell to cut rates and matched expectations from Wall Street. The decision comes amid growing concerns about the weakening U.S. labor market and a rising unemployment rate.The Fed’s statement reiterated the Committee’s dual mandate of maximum employment and returning inflation to 2%. The press release statement noted that job gains have slowed, and the unemployment rate has edged up. Meanwhile, inflation has increased and remains somewhat elevated. The newly appointed Fed Governor, Stephen Miran, dissented against the Committee’s decision and was in favor of lowering the policy rate by 50 basis points. The updated FOMC dot plot indicates that most officials expect at least two more rate cuts in 2025. The Fed board will continue to monitor data to guide its decisions.
Impact on rates
After today’s meeting, the market is now expecting a cut in October, with the probability of a December cut rising to 90%, up from 70% this morning. Chair Powell signaled that the Committee is not on a pre-set course and will continue to be data dependent and make decisions meeting by meeting. The two-year SOFR swap rate dropped seven basis points following the FOMC statement but rallied back to flat during Powell’s press conference. 10-year Treasury yields dipped below 4% on the initial decision before jumping back to 4.06% following Powell’s press conference. The forward curve shifted slightly lower, pricing in a lower terminal rate moving into 2026-2027.
Moving forward
The market will remain focused on inflation and the U.S. labor market. Market participants will closely monitor CPI and unemployment numbers, which will both be released before the October 29 meeting. If the labor market continues to weaken, it may give way to further dissent among Committee members. Powell stated that “downside risk is now a reality and clearly there is more downside risk,” regarding the weakening labor market after the job revision release in July shaved 258,000 jobs from what was initially reported. The Fed’s dot plot depicts a divided outlook among the Committee, representing a median estimate of 3.4% for the federal funds rate at the end of 2026, compared to the market’s expectation of a 2.9%. This change to the dot plot indicates a single quarter-point cut in 2026, which is a significant reduction compared to the current market pricing in 2-3 cuts. The Fed’s statement noted that economic uncertainty remains elevated, and the Committee will continue to be attentive to both sides of its dual mandate.
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