Fixed income markets are confident that the Federal Open Market Committee cuts interest rates at the conclusion of their next scheduled meeting on September 17, according to the CME FedWatch Tool. Current expectations are for a 9 in 10 chance of a cut in the Federal Funds rate from 4.25% to 4.5% down to 4% to 4.25%. Expectations for an interest rate cut have risen after recent soft jobs data released on August 1.
Risk To Job Growth
Softer than expected jobs report for the month of July and significant negative revisions to May and June have raised concerns that the economy is slowing. The level of job creation seen over those months implies slowing economic growth and given the full employment is part of the FOMC’s mandate, interest rate cuts may be viewed as necessary to help spur the economy. That said average Gross Domestic Product growth is estimated at just under 2% over the first half of 2025, so the economy may be cooling rather than seeing a more stark decline.
Cooling Inflation
Inflation has also generally moderated overall in 2025 despite some acceleration early in the year. This is important, because the main reason that interest rates are currently at a relatively restrictive level is to help bring inflation down to the FOMC’s 2% annual goal. Consumer Price Index inflation is currently at 2.7% headline and 2.9% excluding food and energy for the 12 months to June 2025. The most recent CPI reading showed some moderate signs of tariff-related inflation in goods prices. However, various FOMC policymakers have signaled some willingness to look through what may be one-off tariff price increases in setting monetary policy.
Recent Dissents
From a procedural standpoint, two policymakers voted for lower rates at the July meeting, which can be a leading indicator of a coming move from the majority at a later meeting.
Lastly, in June’s Summary of Economic Projections, most policymakers forecast lower rates in 2025, with three meetings remaining, such interest rates would need to come soon. Those projections are now a little stale given incoming economic data, but generally the stance of policymakers remains that rates will move lower.
Incoming Data
There are still several weeks before the FOMC next meets, during that time there will be more data on the economy. Should jobs creation rebound from its early summer slump or inflation heat up, then a cut might become less probable. However, it would be unusual for such high expectations for an interest rate cut to reverse. The key reports before the FOMC next meets will be CPI releases on August 12 and September 11 and the jobs report on September 5.
FOMC Minutes and Speeches
Further policy clues may come from the Fed’s disclosures and speeches. Minutes from the July FOMC meeting will be released on August 20. There will likely be several speeches on monetary policy from policymakers. Including one from Jerome Powell at Jackson Hole, which in the past has offered color on the likely future direction for monetary policy.
What To Expect
It appears that the FOMC may elect to cut interest rates on September 17. That appeared a likely scenario anyway, especially with two dissents calling for a cut at the July meeting. However, soft jobs numbers may have helped confirm the move. Still, there is still more economic data to come before the FOMC meets and surprising data could cause policy to shift. However, markets do expect interest rates to come down over the remainder of 2025.