The Federal Reserve is widely expected to cut interest rates by 25 basis points at its September meeting, marking the first reduction since December. This would lower the policy rate to a range of 4%-4.25%. Market participants, as reflected by the CME FedWatch Tool, assign an 80% probability of a total 75-basis-point reduction by year-end, implying consistent 25 bps cuts in each remaining meeting.
Labor market data has been a key driver, with August Nonfarm Payrolls rising only 22,000 and the unemployment rate climbing to 4.3%. A preliminary benchmark revision also revealed total employment for March 2025 was 911,000 lower than initially reported. Fed Chair Jerome Powell acknowledged rising downside risks to the labor market at the Jackson Hole Symposium, suggesting the Fed's employment mandate may outweigh inflation concerns despite CPI remaining above the 2% target.
The updated Summary of Economic Projections (dot plot) will be closely watched. June's projections implied only 50 bps of cuts in 2025, but analysts from TD Securities and Deutsche Bank anticipate a more dovish shift. Deutsche Bank expects the median dot to show 75 bps of total reductions for 2025. Political factors also play a role, with new Fed appointee Stephen Miran (seen as a dove) joining the board and potentially influencing the vote.
Goldman Sachs' Alexandra Wilson-Elizondo predicts a 25 bps cut but expects hawkish messaging from Powell regarding inflation risks. She notes that non-recessionary rate cuts historically boost stocks by an average of 15% within 12 months, with AI investments providing additional market support.