• Markets now fully expect a Federal Reserve rate cut in September 2025, reversing earlier skepticism.
  • The shift comes amid mixed economic signals, including stubborn inflation and slowing growth projections.
  • Analysts remain divided on the pace of future cuts, with some forecasting a more aggressive easing cycle than the Fed's official projections.

Fed Watch: September Cut Now Priced In

Interest rate traders have returned to fully pricing in a Federal Reserve rate cut for September 2025, marking a significant shift in market expectations after months of uncertainty about the central bank's policy trajectory. The repricing follows the Fed's decision to hold rates steady through the first quarter while signaling growing concerns about economic growth.

"The market is finally aligning with what the economic data has been whispering for months," said a fixed-income strategist at a major Wall Street bank who asked not to be named discussing client positions. "Growth is slowing enough to warrant easing, but inflation won't let them move just yet."

The Data Behind the Shift

The Fed maintained its benchmark rate at 4.25%-4.5% in March, following three cuts in 2024. While inflation remains above target, recent indicators show price pressures moderating more slowly than expected even as economic activity shows signs of cooling. The central bank's own projections now anticipate slower growth through 2025, creating what analysts see as eventual room for easing.

Labor market strength has been the surprise bright spot, with unemployment remaining low. But traders appear to be betting that job growth will slow sufficiently by September to remove the Fed's last barrier to cutting. Consumer spending data showing strained household budgets has added to the case for eventual relief.

Diverging Views on the Path Ahead

Market expectations now contrast sharply with the Fed's December 2024 projection of just 50 basis points in cuts this year. Some analysts, like those at Morningstar, expect three cuts totaling 75 basis points, while futures markets price in a more cautious approach. This disconnect suggests ongoing uncertainty about whether the Fed will respond aggressively enough to slowing growth.

The June meeting looms as the next potential pivot point, though most analysts see September as more likely for the first move. "June would require substantially weaker data," noted the strategist. "September gives the Fed time to confirm the trend."