
Key Takeaways
- After a long pause, the US Federal Reserve cut interest rates last week by 25 basis points.
- The move was prompted by weakness in the US labour market and positioned as a ‘risk management cut’.
- Overall, the US economic backdrop remains relatively benign and growth for the year is expected to be more than 2%.
- Expectations are for two further cuts in 2025 with more to come in 2026. The Fed are keen to manage expectations and are working on a meeting-by-meeting basis.
- A soft landing remains the base case and would provide a supportive environment for US equities. We will be monitoring future data releases closely.
This week we are focusing on US interest rates – what changed last week and what we think is going to happen from here.
As expected, last week the US Federal Reserve (Fed) cut interest rates by 25 basis points. It was the first rate cut of 2025 and follows 100bps of reductions made in 2024. Rates had been on pause for a significant period with the Fed waiting to see the inflation implications of recent tariff announcements. To date they have not seen any significant impacts, but are becoming more concerned about weakness in the US employment market. Fed chair, Jay Powell, framed the rates decision as a ‘risk management cut’ as they try to engineer a soft landing before unemployment picks up too much.
US inflation has risen somewhat, growth remains relatively robust, and unemployment has ticked up a little bit at the margin. Overall, the US economic backdrop remains relatively benign, but we will be watching jobs data closely for any indications that the economy is slowing further. Growth in the third quarter is expected to be north of 3% – a similar number to the previous period – and for the year as a whole we are anticipating more than 2%.
So, what is the Fed doing now? They see reasons to cut interest rates further from here and do have room for manoeuvre. With the 25bps cut last week and the ‘dot plot’ of economic projections, expectations from the Fed themselves (as well as from markets) are that we will see a further 25bps cut in November and another one at the end of the year. For next year, market expectations are for further reductions, but I think the jury is still out on that. Powell himself has commented that the Fed are working on a meeting-by-meeting basis and he seems keen to manage expectations around significant rate cuts in 2026.
Currently, the base case is anchored around the benign backdrop of a soft landing, which in turn would be a supportive environment for US equities. We are not looking at a significant spike in unemployment and while inflation has ticked up modestly it remains within a range that allows the Fed to cut rates when it deems it necessary.
We will be watching upcoming data releases and related news closely. Later this week we get the Personal Consumption Expenditures (PCE) data, which is the Fed’s preferred measure of inflation. Weekly and monthly unemployment numbers will give further insight into the US economy’s direction of travel and we will be listening carefully to Powell’s statements on last week’s rate decision.