On September 17, the U.S. Federal Reserve lowered the federal funds target rate by 0.25%, bringing the target range down to 4%–4.25%.

This decision, which had been fully anticipated by markets for several weeks, represents the first rate cut of 2025. It is, however, unlikely to be the last as the Fed’s central scenario projects two further rate cuts within the year.

Markets had already incorporated this trajectory into pricing, with long-term rates moving slightly higher following Wednesday’s announcement.

Why Cut Rates Now?

This monetary easing comes at a time when inflation remains above 3%, well over the 2% target, and unemployment is still low at 4.3%, close to full employment.

Nonetheless, job creation figures have been drastically revised down this summer, and recent employment data show a weakening labor market, with job losses across many sectors of the U.S. economy. This shift, revealed during the summer and confirmed in September, pushed the Fed to act and signal the start of a likely new rate-cutting cycle.

Markets now expect the federal funds rate to fall below 3.15% by mid-2026 and under 3% by the end of 2026. Meanwhile, with the European Central Bank maintaining its policy stance, the narrowing interest rate differential between the two institutions has contributed to a depreciation of the U.S. dollar in global currency markets.

Is this truly the beginning of a U.S. rate-cutting cycle?

Should weak employment data continue to be validated in the coming months and should tariffs exert only a transitory influence on inflation - as Federal Reserve Chair Jerome Powell has suggested - the Federal Reserve may initiate a series of rate cuts in the near term. Political pressure adds another layer of complexity. The Trump administration openly calls for faster and more aggressive rate cuts and is attempting to install Fed officials more aligned with this strategy.

If the Fed were seen as bending to political influence at the expense of inflation control, investor confidence could erode quickly, triggering higher long-term rates—the opposite effect of what the administration seeks.

Uncertainty remains high, but the bias is clearly toward easing. The possibility of U.S. rate hikes has effectively vanished from the Fed’s communication.