The Federal Reserve’s Federal Open Market Committee (FOMC) lowered its target range for the federal funds rate by 25 basis points, setting it at 4.00% to 4.25%, in a move aimed at countering slowing economic activity and addressing growing downside risks to employment.
The decision reflects a delicate balancing act as policymakers attempt to support the labor market while maintaining focus on bringing inflation back to the Fed’s 2 percent target.
Signs of Moderating Growth
The FOMC statement noted that economic growth has moderated in the first half of 2025. Job creation has slowed and the unemployment rate has edged up, though it remains historically low. Inflation, meanwhile, has risen modestly and remains somewhat elevated, keeping price stability a central concern for policymakers.
The Fed acknowledged that uncertainty about the economic outlook remains high, with increasing risks to employment now weighing more heavily in its deliberations.
Policy Adjustment and Forward Guidance
In light of these conditions, the Committee decided to cut rates by a quarter percentage point. The statement emphasized that any future adjustments will be data-dependent, with officials closely watching economic indicators, inflation dynamics, and labor market conditions.
“In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the FOMC said.
The Fed also confirmed that it will continue reducing its balance sheet by shrinking holdings of Treasury securities, agency debt, and agency mortgage-backed securities — a process known as quantitative tightening (QT).
Inflation Still Elevated
While the pace of inflation has eased from 2022 and 2023 highs, it remains above the Fed’s preferred long-term target of 2 percent. Policymakers are wary that persistent price pressures could re-emerge, particularly as global supply chains continue to adjust and commodity markets remain volatile.
The statement underscored the Committee’s commitment to ensuring inflation expectations remain well anchored. “The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective,” it noted.
Balancing the Dual Mandate
The Federal Reserve’s dual mandate — maximum employment and stable prices — has taken on renewed complexity in recent months. With job gains slowing and unemployment ticking higher, the risks to employment have risen, even as inflation pressures remain present.
This balancing act explains why the Fed opted for a measured rate cut, rather than a larger move. It provides some relief to the labor market without risking an inflation resurgence.
Market and Economic Implications
The rate cut is expected to provide modest support to household and business borrowing, potentially easing financial conditions. Mortgage rates, credit card rates, and business loans could see incremental declines, although they remain at relatively high levels compared to the last decade.
Equity markets may interpret the move as a signal that the Fed is prepared to act against weakening growth, though investors will remain focused on forward guidance and upcoming data releases, especially employment and inflation figures.
Bond yields have already moved lower in anticipation of potential easing, reflecting expectations of slower growth and subdued inflation.
Looking Ahead
The Fed’s next steps will hinge on the flow of economic data. If job losses accelerate or growth slows further, additional rate cuts may follow. However, if inflation proves stickier than expected, the Committee may be forced to hold rates steady for longer.
Policymakers remain clear that flexibility is key. “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” the statement concluded.
Source
Federal Reserve: FOMC Statement — September 17, 2025
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