The Fed’s Tightrope: A 50-Basis-Point Cut in September 2025?

The Federal Reserve faces a defining moment in its September 2025 policy meeting. With the U.S. labor market showing signs of strain and inflation stubbornly above its 2% target, the central bank must navigate a precarious balancing act. The question on everyone’s mind: Will it deliver a 50-basis-point rate cut to stave off a potential downturn, or stick to a more measured 25-basis-point reduction?

The labor market’s deterioration is undeniable. August’s nonfarm payrolls added just 22,000 jobs—far below the 75,000 economists had anticipated—and the unemployment rate climbed to 4.3%, the highest since October 2021 [1]. Revisions to prior months’ data further cloud the picture: June’s job gains were downgraded by 27,000, while July’s were adjusted upward by 6,000, leaving a net reduction of 21,000 jobs over two months [1]. Even sectors traditionally resilient to economic shifts, such as healthcare and social assistance, showed only modest gains, while federal government employment continued to decline due to spending cuts [3].

Meanwhile, inflation remains a persistent headwind. The July 2025 CPI reading stood at 2.7%, and core PCE inflation hit 2.9%, the highest since February 2025 [3]. Services prices, which account for a significant portion of consumer spending, surged 3.6% year-over-year, driven by rising shelter costs and tariffs on goods like household furnishings and transportation services [4]. While energy prices have moderated, the broader inflationary pressures suggest the Fed cannot yet declare victory over price stability.

This dual challenge has forced the Fed into a delicate dance. On one hand, the labor market’s weakening signals a growing risk of a self-reinforcing downturn. As Fed Chair Jerome Powell acknowledged in a speech on August 22, “The balance of risks has shifted toward downside risks to employment,” with a marked slowdown in both labor supply and demand [3]. On the other, inflation remains above target, and the lingering effects of tariffs—though not yet fully priced in—threaten to reignite inflationary expectations [5].

Market expectations reflect this tension. Investors now price in an 86% probability of a rate cut at the September 16–17 meeting, with a 12% chance of a 50-basis-point cut [2]. The latter scenario, while less likely, would mirror the Fed’s aggressive move in September 2024 and signal a more dovish pivot. However, internal divisions persist. While officials like New York Fed President John Williams have signaled openness to cuts, others, including Cleveland’s Beth Hammack and Kansas City’s Jeff Schmid, caution against overreacting to a single weak jobs report [2].

Political pressures add another layer of complexity. Treasury Secretary Scott Bessent has publicly called for a “broad review” of the Fed’s operations, advocating for more aggressive rate cuts to stimulate growth [4]. Yet, as J.P. Morgan analysts note, the Fed’s new governor, Stephen Miran, may temper such demands with a more data-dependent approach [6]. The September meeting will also be closely watched for hints about the path forward in 2026, with some economists projecting three additional 25-basis-point cuts by early next year [4].

The Fed’s decision hinges on two critical data points: the August CPI release (scheduled for September 11) and the final labor market assessment. If inflation shows signs of moderating without a sharp rebound, the case for a 25-basis-point cut strengthens. However, a larger cut remains on the table if the labor market’s deterioration accelerates or if inflation data reveals unexpected stickiness.

In the end, the Fed’s dual mandate—maximum employment and stable prices—demands a nuanced response. A 50-basis-point cut would send a clear signal of urgency but risks inflaming inflationary pressures. A 25-basis-point cut, by contrast, offers a more cautious approach, balancing the need to support the labor market with the imperative to maintain price stability. As the September meeting approaches, the world watches to see whether the Fed will walk the tightrope—or take a leap.

Source:
[1] Fed Rate-Cut Expectations Climb Following Weak Job Market Report [https://www.bloomberg.com/news/articles/2025-09-05/fed-rate-cut-expectations-climb-following-weak-job-market-report]
[2] Jumbo-rate-cut chatter is rising after a dismal jobs report [https://www.businessinsider.com/jumbo-interest-rate-cut-odds-august-jobs-report-labor-market-2025-9]
[3] Speech by Chair Powell on the Economic Outlook and Policy [https://www.federalreserve.gov/newsevents/speech/powell20250822a.htm]
[4] US Treasury Secretary Bessent Calls for Big Changes at Fed [https://www.reuters.com/world/us/us-treasury-secretary-bessent-calls-big-changes-fed-2025-09-05/]
[5] The Fed's September dilemma [https://www.piie.com/blogs/realtime-economics/2025/feds-september-dilemma]
[6] What's The Fed's Next Move? | J.P. Morgan Research [https://www.jpmorgan.com/insights/global-research/economy/fed-rate-cuts]