• Markets now fully expect two Federal Reserve rate cuts by the end of 2025.
  • The Fed held rates steady at its July meeting but saw rare dual dissent calling for immediate cuts.
  • Softening economic data and persistent inflation pressures drive the shifting expectations.

Fed's cautious stance meets market expectations

Financial markets have fully priced in two Federal Reserve rate cuts by the end of 2025, reflecting growing consensus that policymakers will need to ease monetary policy amid moderating economic growth. The shift comes after the Fed held its key interest rate unchanged at 4.25% to 4.5% at its July meeting, though the decision saw the first dual dissent among Fed governors since 1993, with two members voting for an immediate cut.

"The dissent is telling," said one market strategist who asked not to be named while discussing central bank dynamics. "When you have governors breaking ranks after this long holding pattern, it suggests the debate inside the Fed is shifting faster than their public communications indicate."

Data points to softening economy

The changing expectations follow recent economic data showing US GDP growth slowed to 1.2% quarterly in the first half of 2025, down from the 2.7% quarterly average during 2022-2024. While the labor market remains relatively strong, there are emerging signs of softening, with some indicators showing increased difficulty for job seekers despite low overall unemployment.

Inflation, while still above the Fed's 2% target, has shown enough moderation to reduce fears of additional tightening. The central bank's July statement notably avoided any language suggesting heightened concern about price pressures, focusing instead on balancing risks to both employment and inflation goals.

September cut in focus

Futures markets currently price in roughly a two-thirds chance of a cut at the September meeting, with Goldman Sachs among major institutions forecasting the first reduction could come that soon. Analysts point to softer job market data and less inflationary impact from recent tariffs than initially feared as key factors supporting earlier action.

"The window for a September cut is open if we see one more clean inflation print and any further labor market cooling," said a fixed income strategist at a major bank. "After that, December looks like the logical place for cut number two unless the data turns dramatically."

The Fed's cautious approach reflects ongoing uncertainty about the economic impact of recent US tariff policies and other geopolitical factors. While borrowers and equity markets would welcome lower rates, the central bank appears determined to avoid moving too aggressively until the data provides clearer signals.

Correction: An earlier version of this article misstated the current Fed funds target range. It is 4.25% to 4.5%, not 4.5% to 4.75%.