On September 18, 2025, the Federal Open Market Committee (FOMC) voted 11-1 to lower the target range for the federal funds rate by 25 basis points to 4.00%-4.25%, in line with market expectations. This was a cautious easing measure taken by the Federal Reserve in the face of a complex economic environment characterized by slowing economic growth, a cooling labor market, and slightly higher inflation.



Federal Reserve Governor Stephen Milan, who had been in office for only 24 hours, cast the lone dissenting vote, advocating for a larger 50 basis point rate cut, demonstrating a strongly dovish stance. Markets had previously speculated that Trump-appointed governors Michelle Bowman and Christopher Waller might dissent, but both supported the 25 basis point rate cut, and hawkish Kansas City Fed President Schmid also concurred, highlighting the majority consensus.

The Federal Reserve's statement noted that economic growth will slow in the first half of 2025, primarily due to a slowdown in consumer spending. The personal consumption expenditures (PCE) price index rose 2.7% year-on-year in August, while the core PCE rose 2.9%, both above the long-term target of 2%, reflecting persistent inflationary pressures. The labor market has cooled significantly, and Powell repeatedly emphasized the increasing downside risks to employment during his press conference. Weaker labor demand, declining immigration, and declining employment participation rates have led to below-breakeven employment growth.

The Federal Reserve raised its GDP growth forecast for 2025 to 1.6% (1.4% in June), maintained its unemployment rate forecast at 4.5% and PCE inflation forecast at 3.0%, and core PCE inflation forecast at 3.1%.

Powell Press Conference: Employment, Inflation and Policy Neutrality

At the press conference following the meeting, Federal Reserve Chairman Jerome Powell systematically articulated the logic behind the rate cut, emphasizing the shift in the balance of risks and the need for policy adjustments. The following is a logical summary of his core arguments:

Labor market risks intensify

Powell noted that labor market risks have evolved significantly since the previous meeting, with the current market showing "lack of dynamism and some weakness." He specifically noted that hiring remains low, and that if layoffs increase, the unemployment rate could rise rapidly, emphasizing that "it is time to acknowledge that the risks to the jobs mandate have intensified." The cooling labor market is driven not only by declining immigration but also by slowing demand, signaling weakening economic momentum.

Inflation dynamics and tariff impacts

Powell acknowledged some recent increases in inflation, with August PCE data (2.7% overall, 2.9% core) suggesting persistent pressures. Rising commodity prices are the primary driver of inflation, partly driven by tariffs, but he expects this to be a one-off increase and that longer-term inflation expectations remain stable. He emphasized that the overall impact of tariffs on inflation remains to be seen, but emphasized the need to manage the risk of persistent inflation. Powell stated that the Fed is committed to returning inflation to its 2% target and expects most indicators of inflation expectations to be consistent with that target after 2026.

Policy shift towards neutrality

Powell noted that current policy remains "restrictive," but the 25 basis point rate cut is a "risk mitigation" measure aimed at transitioning to a more neutral interest rate level to support employment without exacerbating inflation. He emphasized that the 50 basis point rate cut did not receive broad support, reflecting the Fed's caution regarding significant easing. The policy path is not predetermined but will be adjusted meeting by meeting based on data to address economic uncertainty.

Internal divisions and independence

Regarding the divergent interest rate forecasts shown in the dot plot, Powell explained that this stems from differing understandings of the economic outlook and appropriate course of action, a normal phenomenon in the current complex environment. He reiterated that the Fed's decisions are data-driven and unaffected by politics, stating, "We do not make decisions through a political lens" or based on political considerations. He also emphasized that "the Fed's deeply ingrained culture is to work based on data" to safeguard its independence.

Milan's No vote and dot plot predictions

Stephen Milan's dissenting vote became a focal point of the meeting. As a newly appointed governor, he advocated for a 50 basis point rate cut on his first day, reflecting his strong concern about downside risks to the economy, likely driven by recent weak employment data and tariff uncertainty. The market had expected dissenters such as Bowman or Waller, but the two supported the majority decision, demonstrating a degree of consensus within the Fed on moderate easing. Milan's stance may be linked to his aggressive assessment of the labor market and inflation outlook, or foreshadow his continued push for more accommodative policy within the FOMC.

The Fed's dot plot details the diverging forecasts of 19 officials on the path of interest rates through 2025:

Nine officials expected two more rate cuts (50 basis points cumulatively), bringing the rate to 3.6% by the end of the year;
Six officials expected only one more rate cut (by 25 basis points);
Two officials expected a cumulative rate cut of 50 basis points (two 25 basis point cuts);
One official (likely Milan) advocated for a sharp 150 basis point rate cut (at least two cuts of 50 basis points or more);
One official expected no more interest rate cuts this year, showing a hawkish tendency.

The median forecast for the long-term federal funds rate remains at 3.0%, with projections for 2026, 2027, and 2028 at 3.4%, 3.1%, and 3.1%, respectively. Economic forecasts show GDP growth projected to 1.6% in 2025 (from 1.4% in June), 1.8% in 2026, and 1.9% in 2027. The unemployment rate is projected to be 4.5% in 2025, 4.4% in 2026, and 4.3% in 2027, before falling to 4.2% in 2028. PCE inflation is projected to be 3.0% in 2025, 2.6% in 2026, and 2.1% in 2027, reaching the 2.0% target in 2028. Core PCE inflation is projected to be 3.1%, 2.6%, 2.1%, and 2.0%, respectively.

Market reaction and global impact


(Source of spot gold 5-minute chart: Yihuitong)

The rate cut decision triggered a significant market reaction. The 10-year U.S. Treasury yield fell below 3.99%, its lowest since April 2025. Spot gold hit a record high of $3,707.40 per ounce before retreating to $3,683. The U.S. dollar index (DXY) fell to 96.22, its lowest level since February 2022. The S&P 500 index rose and then retreated, with the real estate and financial sectors rising 1.4% and 1.3%, respectively. Traders increased their bets on further 50 basis point rate cuts in October and December, with the probability of a 25 basis point cut in October rising from 71.6% to 94%.

Global central banks quickly followed suit, with Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates all cutting interest rates by 25 basis points. The offshore renminbi (CNY) broke through 7.09 against the US dollar, reaching its strongest level since November 2024. Argentina raised a technical dispute over the peso's breach of the upper limit of its foreign exchange trading range, signaling currency pressure. Market expectations for a dovish shift from the Federal Reserve grew, but Powell's cautious rhetoric and the hawkish signal from the dot plot also triggered volatility.

Institutional Analysis and Outlook

The Wall Street Journal (Nick Timiraos): "Federal Reserve forecasts suggest future decisions will be more contentious, with seven predicting no more rate cuts this year and two predicting just one, suggesting most officials remain cautious about further easing given strong economic expectations."

Bloomberg: "Powell's cautious tone reflects the Fed's delicate balance between employment and inflation. The data-driven and no preset path stance shows that the Fed retains flexibility to respond to uncertainties such as tariffs."

Simon Dangoor of Goldman Sachs: "The dovish bias in the FOMC's forecasts suggests a priority for economic growth, but a significant upside surprise in inflation or employment could change the path of easing."

Financial Times: "The Fed's rate cuts and cautious signals reflect heightened global uncertainty, and emerging markets need to prepare for volatility."

Reuters: "The Fed's cautious rate cuts and Powell's focus on risk management indicate that it is moving cautiously in a complex economic environment, and the interaction of inflation, employment and trade policies will bring market volatility."

Summarize

The 25 basis point rate cut is a direct response by the Federal Reserve to heightened downside risks to employment, while maintaining vigilance against inflation, particularly given the potential for tariffs to push up prices. Powell emphasized the transition to a neutral interest rate, aimed at supporting employment without triggering runaway inflation, demonstrating a heightened sensitivity to economic uncertainty.

Milan's dissenting vote and the differences in the dot plot reflect different judgments within the Federal Reserve on the extent of easing, adding uncertainty to the policy outlook.

Market expectations for further rate cuts are rising, but hawkish forecasts and Powell's cautious rhetoric suggest that future policy will be highly data-dependent, particularly given the dynamics of tariffs, employment, and inflation. The coordinated reactions of global markets and central banks highlight the spillover effects of the Fed's policies, prompting investors to closely monitor upcoming economic data and geopolitical developments.