Written By: Nate Garrison, CIO, World Investment Advisors
What Happened at the Fed's September 2025 Meeting?
The Federal Reserve Open Market Committee (FOMC) decided at its September 17, 2025, meeting to lower the federal funds rate by 0.25% to 4 – 4.25%.
The FOMC vote for a 0.25% cut was not unanimous; recent Trump appointee Steve Miran voted to cut the fed funds rate by 0.50%, the lone dissenter from the rest of the Committee.1 The Trump administration has been extremely vocal in recent months about its desire for the FOMC to make cuts to the fed funds rate, which had so far gone unheeded.
Unanimous votes were common at FOMC meetings until recently. The FOMC previously met on July 30, 2025, and voted to keep rates steady; that vote was also not unanimous, as FOMC members Christopher Waller and Michelle Bowman voted for a cut in July while the rest of the FOMC voted to leave rates unchanged. Both Waller and Bowman voted in favor of the quarter-point cut at this meeting, however.
The Fed also struck a notably more “dovish” tone, hinting at the possibility of two additional rate cuts before the end of the year – one in October and another in December.
The updated “dot plot,” which reflects policymakers’ individual rate projections, showed a median forecast for two further cuts in 2025, bringing the federal funds rate down to a target range of 3.5% to 3.75% by year-end. Markets reacted quickly, with the CME Group’s FedWatch tool showing the probability of a cut at the October meeting jumping to 87.66%, up from 74.25% just a day earlier. The odds of a second cut in December also rose meaningfully, climbing from 69.22% to 81.77% following the Fed’s release and Chair Powell’s post-meeting press conference.2
Why is the Fed Cutting Rates Now?
The FOMC is increasingly concerned about the direction and health of labor markets.
Expectations for a deeper rate cut were high earlier this year, as markets worried about negative impacts on economic growth and unemployment from the Trump administration’s new tariffs and expected the Fed to act accordingly. Those rate cut expectations abated over the spring and into the summer and were eventually unrealized, as economic data indicated resiliency in the economy and labor markets that made the case for a Fed rate cut weaker. FOMC Chairman Jerome Powell described labor market conditions as “solid” as recently as their July 30, 2025, meeting.3
At this September meeting, however, Powell shifted his language and tone from July, stating in his post-announcement comments that job growth has slowed and unemployment has edged up, while “…downside risks to employment have risen.” Powell noted that both demand and supply of labor have weakened recently, an unusual occurrence. Open jobs per unemployed person fell below 1.00 in August 2025 for the first time since April 2021 (0.868 open jobs per unemployed person); this is also below its trailing 12-month average of 1.06 open jobs per unemployed person.4
How Did Markets React to the News?
Markets responded to the announcement with initial volatility but closed the day mostly flat.
Per CME Group’s FedWatch, markets were almost 95% confident before the FOMC meeting that there would be at least a quarter-point cut in the fed funds rate.5 The lack of major price action by day’s end suggests markets may have already priced in the quarter-point cut.
Equity markets were volatile after the announcement but closed the day flat, with the S&P 500 down -0.10% for the day. Fixed income markets reacted similarly, with initial volatility that closed out the day mostly flat. Short-dated Treasury yields dropped only a few basis points despite the 25-basis-point cut, while the ever-important UST 10-Year yield actually edged up 0.02%.
Where Does This Rate Cut Put Us?
Fed funds rates are off their recent highs but still above levels from the pre-COVID era.
This is the first cut by the FOMC of the federal funds rate since their December 2024 meeting. That cut concluded the FOMC’s prior round of rate reductions totaling 1.00% over three months starting at the September 2024 meeting.
Fed funds rates are now 1.25% lower than their most recent high of 5.25 – 5.50%, a level reached after the FOMC raised rates eleven (11) times from March 2022 through July 2023 in response to the spike in inflation following the COVID crisis of 2020-2021.5 Fed funds rates are still far above the pre-COVID high of 2.25 – 2.5% last set in June 2019. Inflation has remained stubbornly above the Fed’s 2% long-run target, and the Fed has not lowered fed funds rates as a result.
What Are We Watching That Might Influence Fed Decisions Going Forward?
1) Health of Labor Markets
The WIA Investment Team continues to believe that the Fed will remain laser-focused on the labor market, and we believe the Fed is likely to act more aggressively if labor market conditions continue to deteriorate going forward.
The Fed has a dual mandate of 1) price stability and 2) full employment. Since October 2024, the WIA Investment Team has stated its belief that the labor market would likely be the determining factor driving the timing and trajectory of any Fed rate cuts. Although inflation remains above the Fed’s 2% target, we think they are willing to sacrifice that goal in the short term if the need arises for them to be supportive of labor markets by cutting rates and taking other actions.
The next major catalyst for markets and the Fed’s decision will be the September Nonfarm Payrolls report, scheduled for release on October 3. In the meantime, a steady stream of survey data is expected to offer additional clues on the health of the economy and the labor market ahead of that key print.
2) Uncertain Impacts from Trump’s Tariffs and Tax Cuts on Inflation and Economic Growth
Tariffs and tax cuts may lead to changes in consumer spending and business investment decisions, but the direction or path of those changes remains unclear, and their impacts on inflation and economic growth are uncertain.
Although we believe that the initial uncertainty from the Trump tariffs has decreased since April 2025, we don’t think the impacts of tariffs have been fully felt yet by US businesses and consumers. Tariffs are de facto consumption taxes that increase the costs of goods subject to the tariffs, and their impacts are unfamiliar to consumers and businesses that have been accustomed to no or low tariffs for many recent economic cycles.
Further fanning inflation flames are the Trump tax cuts, which will provide trillions of dollars of (expensive) de facto stimulus that, in a normal environment, would likely stimulate both growth and inflation in the economy. Their impact on an economy unaccustomed to the costs of tariffs remains to be determined.
Chairman Powell stated at the post-announcement conference today, “…[our] obligation is to ensure that a one-time increase in the price level does not become an ongoing inflation problem.”6
The Fed faces a unique challenge going forward, as the combination of tariffs and tax cuts and their impacts on inflation and growth is creating an uncharted economic dilemma that the Fed must navigate – support labor markets and risk turning inflation flames into an inferno, or fight the inflation fire and risk drowning the labor market? Much uncertainty remains for the Fed, at least in the near term.
3) Changes at the Fed and “Fiscal Dominance”
The WIA Investment Team is closely watching how changes in the makeup of the Fed’s Board of Governors may lead to a more dovish Fed that is also acquiescent to the Trump administration’s fiscal policies.
The Trump administration has appointed one new member to the Fed’s Board of Governors (Steve Miran) and is actively seeking to remove & replace another (Leslie Cook). Trump will also likely replace Jerome Powell as Chairman in May 2026, though it remains to be seen if Powell will remain on the Board as a Governor through the end of that term in January 2028.
If Trump has his way with the Fed’s Board of Governors, we expect an increased likelihood of a “fiscal dominance” scenario playing out, where US monetary policy is set not based on economic conditions, but on what will be most helpful for the government as it seeks to manage its interest costs. Regardless of any fiscal benefits that may or may not result from a “fiscal dominance” situation, we believe that a loss of some or all of the Fed’s independence will be a net negative for markets and the economy.
The WIA Investment Team will continue to monitor policy, markets, and the economy, and provide you updates and our analysis in the weeks and months to come. We will cover these topics and others during our next Quarterly Market Series in mid-October 2025. Please contact us at cio@worldadvisors.com with any questions, comments, or requests.
For assistance with your workplace retirement plan, please schedule a call with the SMARTMap Financial Advocate team here.
Sources:
1. Board of Governors of the Federal Reserve System. (2025, September 17). Federal Reserve issues FOMC statement. U.S. Federal Reserve. Accessed 17 Sept 2025. https://www.federalreserve.gov/newsevents/pressreleases/monetary20250917a.htm
2. CME Group. (n.d.). FedWatch Tool: Probabilities of FOMC rate moves. Accessed 17 Sept 2025.
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html.
3. Board of Governors of the Federal Reserve System. (2025, July 30). Transcript of Chair Powell’s press conference. U.S. Federal Reserve. Accessed 17 Sept 2025. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20250730.pdf.
4. U.S. Bureau of Labor Statistics, Job Openings: Total Nonfarm [JTSJOL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/JTSJOL . Accessed 17 Sept 2025. U.S. Bureau of Labor Statistics, Unemployment Level [UNEMPLOY], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNEMPLOY . Accessed 17 Sept 2025.
5. Board of Governors of the Federal Reserve System. (n.d.). The Fed Explained – Accessible Version. U.S. Federal Reserve.
https://www.federalreserve.gov/aboutthefed/fedexplained/accessible-version.htm . Accessed 17 Sept 2025.
6. Board of Governors of the Federal Reserve System. (2025, September 17). Transcript of Chair Powell’s press conference opening statement. U.S. Federal Reserve. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20250917.pdf . Accessed 17 Sept 2025.