Federal Reserve Chairman Jerome Powell speaks during a news conference following the Federal Open Market Committee meeting, Wednesday, Sept. 17, 2025, at the Federal Reserve Board Building in Washington. (AP Photo/Jacquelyn Martin)
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The Federal Open Market Committee is broadly expected to cut interest rates to below 4% on October 29. That’s according to the CME FedWatch Tool which projects the chance of a cut at 97% based on fixed income markets. Forecasting markets have a similar projection. The FOMC’s own forecasts from September suggest that rates were likely to move lower over the remainder of 2025 with two more cuts the most likely outcome, but a significant minority of policymakers were comfortable with rates at current levels.
The Government Shutdown and Economic Data
The government shutdown has delayed the release of some of the economic data that the FOMC considers in its decision making. That means the FOMC may not have the usual updates on the economy from government statistics when it next meets. Still there are many alternate data sources and the broad picture appears to be that the jobs market is softening and there are some limited inflationary pressures from tariffs. Furthermore, the government shutdown itself is expected to be a drag on growth. The FOMC is expected to cut rates to help manage risks to the jobs market, even if inflation is somewhat above target.
The Expected Path For Interest Rates
The Federal Funds rate currently stands at 4% to 4.25%. An expected cut to interest rates on October 29 could bring the rate to 3.75% to 4%. On current forecasts the rate could move to closer to 3% in 2026. The October 28-29 meeting is the second to last scheduled meeting of 2025 for the Fed, with the final meeting scheduled for December 9-10. The December meeting is also expected to see a cut in rates.
Worries For Both Jobs and Inflation
In the current economy, the FOMC has to balance inflation, which is a little over the Fed’s 2% annual goal, and the jobs market, which appears to be softening. Higher inflation would call for higher rates, risks to the jobs market perhaps imply a need for lower rates. Clearly the FOMC cannot do both. Given that rates are currently believed to be somewhat restrictive by many policymakers, the planned approach is likely to cut rates to help address potential risks to the jobs market. However, the Fed will also watch inflation trends closely, because if inflation does accelerate, then the FOMC may find it harder to cut rates unless the jobs market shows real distress.
Fed Governor Michael Barr summarized the risks at a speech on October 9, “There was, and remains, considerable uncertainty about the future course of the economy. It is possible that recent low payroll growth is a harbinger of worse to come, or that payroll growth eventually strengthens, consistent with the low unemployment rate and sound growth. It is possible that tariffs will have only a modest impact on the course of prices and that progress resumes toward 2 percent inflation next year, but it is also possible that both inflation and expectations of future inflation escalate.”
What To Expect
The FOMC is expected to cut rates at its two upcoming meetings in September and December. This is primarily motivated by the jobs market softening. The jobs market had been strong for some time, and now risks to the job market are a little more elevated in the Fed’s view. The FOMC may react to that by dialing back interest rates a little. Still, the FOMC is also keeping a close eye on inflation and should that accelerate the interest rate trade-off may become more complex.
