Monetary Policy Update: September 2025
As was largely expected, the Federal Reserve announced this afternoon that it would cut its short-term policy rate by 25 basis points, targeting a new rate of 4.00% to 4.25%. This is the first rate cut since December 2024.
How did markets respond to the news?
Generally speaking, markets were unsurprised by the Fed's announcement today. The S&P 500 and tech-heavy Nasdaq were down fractionally at market close. The Dow closed the day up 0.6% and small cap stocks finished up about 0.2%.
The US Treasury yield curve steepened on the news. Treasury yields declined marginally for all maturities of 1 year or less. Treasury yields for maturities two years and longer were up at least 4bps. Both 5- and 10-year Treasury yields were up about 7bps on the day.
What is the Fed's "forward guidance"?
The Fed is projecting an additional 25 bps cut at each of the two remaining meetings in 2025 for a year-end projection of 3.5% to 3.75%. The Fed currently forecasts only one rate 25bps cut in 2026 and one 25bps rate cut in 2027.
In short, the Fed's monetary policy guidance for the remainder of 2025 is right in line with what markets have been pricing in. For what it's worth, it remains to be seen if the Fed will enact another two cuts this year if GDP growth remains solid and the unemployment rate remains somewhat unchanged.
What will the Fed be most focused on in the months ahead?
In today's press release, The Fed did imply that it is more focused on unemployment than inflation at this point. The Fed seems to be less concerned about inflation than it has been over the past couple of years. One reason for this mindset is that monetary policy will likely remain in restrictive territory even if the Fed elects to cut rates by another 25bps in October and December 2025. Another reason is that the Fed does not believe that tariffs will keep inflation sticky over the long term. These two factors, coupled with the fact that inflation has declined in 2025, seem to be leading the Fed to place more weight on maximum employment going forward.
We will continue to update you on monetary policy as facts and circumstances change.
