2025-09-18
A recession looks slightly less likely after a 25 bp cut to a 4.00%–4.25% range, but the outcome still hinges on steady disinflation and a gradual cooling in jobs without a sharp rise in unemployment.
The Federal Reserve lowered the federal funds target range by 0.25 percentage points to 4.00%–4.25%, noting slower job gains, an unemployment rate that has edged up while remaining low, and inflation that remains somewhat elevated. [1]
The statement stressed that downside risks to employment have increased and that any further moves will be decided meeting by meeting, preserving a data‑dependent approach as officials balance growth and price stability.
Balance sheet runoff continues, so policy eases through rates while quantitative tightening proceeds in the background, which keeps the overall stance measured rather than strongly stimulative.
A single dissent favoured a larger 50 bp reduction, showing some appetite for stronger insurance against labour‑market weakness, while the majority opted for a smaller step to retain flexibility.
| Item | Latest | Why It Matters |
|---|---|---|
| Target range | 4.00%–4.25% cut by 25 bps | Begins rate relief at the policy apex without pre-committing to a path |
| Labour tone | Job gains slow; unemployment up slightly, still low | Signals a softer demand for workers and a higher downside risk to jobs |
| Inflation tone | “Somewhat elevated” in recent months | Keeps disinflation in focus and limits the pace of easing |
| Balance sheet | Runoff continues (QT) | Normalises reserves while rates ease to cushion demand |
| Guidance | Data dependent with optional further cuts | No preset path, next steps guided by inflation and employment data |
A modest rate cut lowers financing costs at the margin and supports interest‑sensitive demand, which can trim near‑term recession odds if prices keep easing and the labour market cools gradually.
Officials signalled readiness to consider further adjustments if warranted, reducing the risk of staying too restrictive as hiring slows, though any stickiness in inflation could curb the pace of relief.
| Channel | What Eases | Why It Matters |
|---|---|---|
| Mortgages and consumer loans | Monthly payments fall in stages as lenders reprice | Frees household cash flow and steadies big-ticket spending if confidence holds |
| Business credit | Funding costs dip for capex and working capital | Supports investment, hiring plans, and inventories as conditions loosen modestly |
| Financial conditions | Easier credit and firmer risk appetite at the margin | Cushions shocks and reduces downside tail risk if inflation expectations stay anchored |
| Confidence and expectations | Clearer path with optionality rather than a fixed plan | Lowers uncertainty for budgets and hiring while guarding the 2% goal |
Coverage highlighted scope for more cuts without a pre-set path, shifting focus from if to how many moves the data may justify in the months ahead.
Reports also framed this as the first cut in months, a milestone that often shifts investor focus to the cadence of inflation and employment prints rather than a single meeting. [2]
Inflation glides toward the 2% objective while hiring slows only gradually, allowing measured easing without losing price control.
Borrowing costs fall in stages, supporting housing and durable goods without reigniting excess demand or price pressure.
Business credit loosens enough to stabilise investment and employment into year‑end as conditions ease modestly.
Confidence steadies across households and firms as policy signals flexibility and readiness to respond to fresh risks.
Inflation proves sticky, forcing a slower pace of cuts and keeping real rates restrictive as hiring fades.
A negative shock tightens financial conditions faster than policy can offset, weighing on spending and investment.
Labour‑market softening accelerates, lifting unemployment more quickly than expected and undermining income growth.
Asset prices wobble as earnings slow, weakening confidence, while credit improves only gradually.
What To Watch Next
Labour reports: softer job gains are acceptable if unemployment edges up only slowly and participation remains stable.
Inflation prints: continued progress toward 2% would validate the cut and support a measured path of easing.
Financial conditions: modest declines in mortgage, auto, and small‑business rates would show transmission is working.
Policy remarks: statements that emphasise optionality and data dependence will guide expectations on timing and size.
Households should expect gradual relief rather than instant change, especially where fixed‑rate loans reprice slowly, with better terms appearing as lenders update schedules and prices continue to cool.
For prospective borrowers and savers, budgeting remains important while inflation is still somewhat elevated, since lower rates arrive in stages rather than all at once.
Firms can revisit investment and hiring plans as funding costs ease, yet should keep a close eye on demand signals and input costs in case momentum cools faster than expected.
One vote favoured a larger 50 bp reduction, which indicates some policymakers prefer stronger insurance against labour weakness now rather than later as risks tilt toward employment. [3]
The majority's smaller step reflects caution while inflation remains somewhat elevated, preserving scope to adjust as the data evolve at each meeting.
Maintaining balance sheet runoff while trimming the policy rate balances two goals by normalising reserves and market functioning while easing borrowing costs to steady demand.
That mix tempers market froth even as financing improves, and it keeps an additional lever in reserve if financial conditions loosen too quickly or inflation expectations drift.
By cutting 25 bps to 4.00%–4.25% and keeping a data‑dependent stance, the Committee made a soft landing more achievable without committing to a rapid easing cycle.
Recession risk is lower at the margin if inflation keeps easing and jobs cool gradually, but sticky prices or a confidence shock could still complicate the path.
The signal is clear for now: flexibility first, with further adjustments possible if the balance of risks continues to lean toward employment.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment, or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction, or investment strategy is suitable for any specific person.
[1] https://www.federalreserve.gov/newsevents/pressreleases/monetary20250917a.htm
[2] https://edition.cnn.com/business/live-news/federal-reserve-interest-rate-09-17-25
[3] https://www.reuters.com/business/fed-lowers-interest-rates-signals-more-cuts-ahead-miran-dissents-2025-09-17/
