Rate Cut Marks Start of Fed’s Shift Toward Neutrality
September 17, 2025 By Sage Advisory
The Federal Reserve cut its benchmark interest rate by a quarter percentage point at the September FOMC meeting, lowering the federal funds target range to 4.00%–4.25% in its first reduction since December. The move, widely expected by markets, reflects growing concern over a cooling labor market even as inflation remains above the Fed’s 2% goal. Officials also confirmed that balance sheet runoff will continue under existing caps, signaling that quantitative tightening remains in place despite the shift in rates.
Fresh projections from the Fed’s Summary of Economic Projections show policymakers expect the policy rate to fall to 3.6% by year-end, implying two more cuts in 2025, followed by a gradual decline to 3.4% in 2026 and 3.1% in 2027. Inflation is forecast to ease from current levels—headline PCE at 2.7% and core at 2.9%—toward 2.6% in 2026 and 2.1% by 2027. Growth estimates were revised slightly higher to 1.6% for this year, while unemployment is projected to rise to 4.5% at year-end before edging lower in the years ahead.
Fed Chair Jerome Powell repeatedly commented on the declining demand for labor. Powell characterized the policy change as a recognition of the shifting balance of risks between inflation and employment. While goods prices have firmed, partly due to tariffs, Powell noted that labor demand is weakening faster than supply, pushing unemployment higher and raising downside risks to jobs. He described the cut as a step toward a more neutral stance, emphasizing that the Fed remains committed to its dual mandate even as inflation risks persist.
Looking forward, Powell stressed that policy would remain data dependent. The updated dot plot reveals a divided committee, with some officials favoring no further cuts and others advocating a more aggressive path. Markets currently expect at least one additional quarter-point reduction this year, but Powell underscored that future moves would hinge on inflation trends, labor market data, and the evolving impact of tariffs. For now, the Fed is treading a narrow path—easing to support employment without reigniting price pressures.
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