Why Investors Should Position for a Fed Rate Cut by September 2025

As the Federal Reserve navigates the complex interplay of tariffs, inflation, and labor market resilience, investors are left to decode whether a rate cut is imminent—and how to position portfolios accordingly. Recent signals from Chair Jerome Powell, muted inflation trends, and market pricing all point toward a September 2025 pivot. Let's dissect the data to build a case for aggressive portfolio adjustments.

Powell's Tariff Uncertainty: A Catalyst for Caution, Not Certainty

Powell's recent testimony highlighted the Fed's dilemma: tariffs could either trigger a one-time price spike or morph into persistent inflation. While the central bank has held rates steady at 4.25%-4.5%, it remains in “wait-and-see mode” until clearer data emerges. The risk here is asymmetric: if tariffs drive prolonged cost pressures, the Fed may need to hike rates further. But if their impact is transitory, the path to cuts opens.

Crucially, the Fed's dual mandate—price stability and maximum employment—means it won't act until labor markets show cracks. With unemployment at 4.2% (a three-month flatline), the Fed has signaled it will wait for 2-3 months of weakening data before easing. This sets a high bar but doesn't rule out September.

Inflation Trends: A Slowing Train, But Not Off the Tracks

Recent inflation data offers a mixed but cautiously optimistic picture:
- CPI dipped to 2.3% in April 2025 (the lowest since 2021) before inching up to 2.4% in May. Core inflation (excluding energy/food) remains subdued at 2.8%, near multiyear lows.
- Energy markets remain volatile: gasoline prices fell 12% in May, but natural gas surged 15.3% annually due to Middle East tensions.
- Shelter costs, which account for over half of CPI's monthly changes, rose just 0.3% in April—a far cry from the double-digit spikes of 2023.

The Fed's 2025 inflation projection of 3% is achievable if energy volatility stabilizes. However, tariffs could disrupt this—goods imported before tariffs may still be in circulation, delaying their full price impact. By summer, we should see clearer pass-through effects.

Market Expectations: The Data Says “September”

The CME FedWatch Tool reveals a 55%-78% probability of a rate cut by September, with a 38.6% chance of a 25-basis-point reduction. Analysts are split but trending toward optimism:
- Goldman Sachs sees one cut in 2025, while UBS anticipates a September start.
- Wells Fargo and Morningstar predict two cuts by year-end.
- The Fed's own “dot plot” hints at two cuts by December, but the timing hinges on labor data.

Importantly, market pricing already reflects a September cut. The yield curve has flattened, and bond markets are signaling reduced inflation fears. Investors who ignore this risk missing the rally in rate-sensitive assets.

The Labor Market: The Final Gatekeeper

The Fed's stance is clear: no cuts until labor markets soften. Key triggers include:
- A sustained rise in unemployment above 4.5% (the Fed's 2025 projection).
- Declines in job creation (e.g., payroll growth below 100,000/month).
- Rising long-term unemployment, signaling structural shifts.

Recent data shows cracks:
- Jobless claims have edged up to 245,500 (a four-week average).
- Housing starts hit their lowest level in five years, hinting at broader economic softness.

If these trends persist, the Fed will cut rates in September—not because inflation is soaring, but to preempt a slowdown.

Investment Implications: Position for a September Pivot

The data-driven case for a September rate cut is strong. Here's how to act:
1. Rotate into Rate-Sensitive Sectors: Utilities, real estate (e.g., REITs), and consumer discretionary stocks typically outperform during easing cycles.

1. Reduce Duration Risk: Shorten bond maturities or invest in inverse Treasury ETFs to capitalize on yield declines.
2. Monitor Tariff Developments: If tariffs drive unexpected inflation spikes, consider inflation-protected bonds (TIPS).

Conclusion: The Clock Is Ticking

The Fed's hands are tied by data—specifically, labor market trends and tariff impacts. While risks remain, the market and Fed projections are aligning for a September cut. Investors who delay adjustments risk missing the liquidity-driven rally in rate-sensitive assets. Stay ahead of the curve by tilting portfolios toward sectors poised to benefit from lower rates—and keep an eye on that September meeting.