Federal Reserve to Cut Interest Rates in September, Market Odds Suggest

The Federal Reserve is expected to cut interest rates by 25 bps at its September meeting, with a 87.8% chance according to CME's FedWatch tool. This would be the first rate cut since November 2023. The Fed has held the federal funds rate steady since then.

The Federal Reserve (Fed) is expected to cut interest rates by 25 basis points (bps) at its September meeting, according to the CME Group's FedWatch tool, which currently shows an 87.8% chance of this event. This would mark the first rate cut since November 2023, following five consecutive months of holding the federal funds rate steady.

The Fed's decision to keep rates unchanged at its July meeting was influenced by the ongoing economic uncertainty, particularly the impact of President Trump's tariff policy on inflation. Despite the President's pressure for rate cuts, the central bankers opted to wait and monitor the economic data before making any moves. This cautious approach was underscored by two Fed governors voting against the consensus, advocating for a rate cut in July, a rare occurrence in the past three decades [1].

The upcoming September meeting will be pivotal for monetary policy. The Fed will have two sets of inflation and jobs reports to consider, which will provide crucial insights into the economy's trajectory. Traders' expectations of a rate cut in September have dropped to 45%, down from 63% the previous day, indicating a shift in sentiment [2].

Federal Reserve Chairman Jerome Powell emphasized the difficulty of gauging the impact of tariffs on inflation during his press conference following the July meeting. He noted that while the effects on inflation could be short-lived, there is also a risk of more persistent inflationary pressures. Powell's remarks highlighted the Fed's obligation to keep longer-term inflation expectations well-anchored and prevent a one-time price increase from becoming an ongoing problem [3].

The Fed's decision to potentially cut rates later this year comes amidst a backdrop of rising mortgage rates. Powell acknowledged that the Fed cannot control the housing market's trajectory, as mortgage rates are more closely tied to the 10-year Treasury yield. The chronic undersupply of homes, exacerbated by the Great Financial Crisis and recent tariffs, remains a significant challenge [4].

In summary, the Federal Reserve is expected to cut rates by 25 bps at its September meeting, with a high probability according to the CME FedWatch tool. This decision will be based on the economic data available before the meeting and the Fed's assessment of the potential impacts of tariffs on inflation. Investors and financial professionals should closely monitor the upcoming inflation and jobs reports for further insights into the Fed's monetary policy direction.

References:
[1] https://www.cnn.com/business/live-news/federal-reserve-interest-rate-07-30-25
[2] https://www.cnn.com/business/live-news/federal-reserve-interest-rate-07-30-25
[3] https://www.cnn.com/business/live-news/federal-reserve-interest-rate-07-30-25
[4] https://www.cnn.com/business/live-news/federal-reserve-interest-rate-07-30-25