Federal Reserve cuts interest rates 0.25% and signals additional cuts likely in coming months

The Federal Reserve cut its target federal funds interest rate by 0.25% to a range of 4.00%-4.25% following its regularly scheduled two-day meeting, an outcome investors widely expected. One of the 12 voters dissented today’s decision, instead favoring a 0.50% cut. The Fed’s updated projections show members anticipate two additional rate cuts in the two remaining meetings this year, and one additional cut in 2026. Fed Chairman Jerome Powell echoed recent comments highlighting that the balance of risks between softer employment data and above-target inflation justifies less restrictive policy. In recent months, interest rate markets shifted expectations dramatically from a policy rate near 3.25% by year-end 2026 to currently near 2.9% after the Bureau of Labor Statistics downwardly revised past hiring data. The Fed previously held rates steady this year due primarily to tariff uncertainty and above-target inflation. The Fed previously cut rates by a total of 1% in 2024’s second half.

The Fed’s updated statement noted, “Job gains have slowed but unemployment remains low. Inflation has edged up and remains somewhat elevated.” The Fed’s Summary of Economic Projections upgraded median economic growth expectations for 2025, 2026 and 2027, while increasing the median 2026 inflation expectation and slightly decreasing the unemployment rate projection for 2026. Median policy rate projections, also known as the “dot plot”, suggest two more rate cuts this year and one more next year. Fed members cited tariff uncertainty as reason to refrain from cutting rates earlier this year. Inflation has not accelerated as rapidly as many economists feared but has modestly increased in recent months. Business “prices paid” surveys and rising tariff revenue suggest inflation could rise further, contributing to the Fed’s emphasis on a data-driven approach to policy decisions.

During the press conference, Powell highlighted this meeting’s rate cut as a “risk management cut” as growth expectations ticked higher despite recent labor market weakness. He also said, “To the consumer, the pass-through (of tariffs) has been pretty small,” but companies intend to pass along more cost increases.

Aggressive policy tightening in the form of rate hikes between early 2022 to mid-2023 helped drive Core Personal Consumption Expenditures Price Index (Core PCE), the Fed’s preferred inflation gauge, from a peak above 5.5% year-over-year in 2022 to 2.9% in July. The Fed targets inflation near 2%.

The Fed slowed the monthly reduction in its $6.3 trillion bond holdings earlier this year. Its bond holdings peaked at $8.5 trillion in 2022 before the Fed allowed bonds to mature without replacement up to $60 billion per month, then shrinking the pace of bond “runoff” in April to $40 billion per month. Slower or no balance sheet runoff improves market liquidity relative to faster runoff. Liquidity refers to the amount of money readily available to buy goods, services and financial assets in an economy. Strong liquidity can also provide cushion against unforeseen financial market shocks, and liquidity measures remain constructive for now.

Stocks and bonds posted mixed results today. Large stocks, represented by the S&P 500, fell 0.1% while small stocks represented by the Russell 2000 Index rose 0.18%. Ten-year Treasury bond yields increased 0.05% to 4.08%, while two-year Treasury yields increased 0.05% to 3.55%.

Monetary policy, defined as central bank target interest rates, eased considerably year-to-date outside the U.S. The European Central Bank cut rates by 1.00%, while the Bank of England, Reserve Bank of Australia and the Bank of Canada cut by 0.75%.

We retain a constructive outlook for diversified portfolios, acknowledging the contrast between solid recent economic data versus potential negative impacts from tariffs. We see opportunities leaning into globally diversified stocks and assets somewhat more sensitive to inflation such as global infrastructure and Treasury inflation-protected securities. Consumer spending and corporate earnings growth remain resilient. Some early signs have emerged that tariff-related price increases may be in the pipeline, albeit less than many economists anticipated. We will keep you informed of our views as new data becomes available and as we update our assessment of market conditions.

As always, we value your trust and are here to help in any way we can. Please do not hesitate to let us know if we can help address your unique financial situation or be of assistance.

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