FED - Set to begin measured rate cuts in September

Fed set to begin measured rate cuts in September

The Federal Reserve (Fed) will likely cut rates by 25 basis points (bps) in September, after leaving it unchanged since December. Signs of weakness in the labor market are intensifying. By contrast, inflation is picking up again in both goods and services and is moving further away from the 2% target than unemployment is from its objective. However, the central bank is likely to downplay this surge, viewing price pressures as temporary. Attention is now turning to the post-September outlook, with the update of the “dot plot” including forecasts through 2028 and the likely participation of Stephen Miran in the Federal Open Market Committee (FOMC), pending Senate confirmation.

Our expectations:

• The federal funds rate will be lowered to 4.00%–4.25%, with broad consensus within the committee. This decision reflects labor market weakness, the absence of a surge in goods prices, and the partial easing of trade uncertainties.

• The Fed will remain data-dependent in adjusting its path.

• The Summary of Economic Projections (SEP) will be slightly revised, especially for 2025 and 2026: somewhat slower growth, unemployment above 4.5% in 2026 and unchanged inflation, with core Personal Consumption Expenditures (PCE) expected above 3% by year-end, gradually converging toward 2% in 2027.

• In this context, slowing activity and labor market weakness argue for greater monetary easing than anticipated in June, leading to a lower terminal rate by 2027.

o            2025: another cut to 3.9%

o            2026: two further cuts to 3.4%

o            2027: another cut to 3.1%, close to the long-term rate of 3%

o            2028: rate stable

In summary, the Fed should begin a measured rate-cutting cycle in September. The labor market will remain at the center of its concerns, while the rebound in inflation—linked to U.S. trade policy and seen as temporary—should pave the way for a faster normalization toward a neutral level.

Completed 15/09/2025. This commentary is provided for information purposes only. The opinions expressed by La Française are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. Crédit Mutuel Asset Management: 128 Boulevard Raspail, 75006 Paris is an asset management company approved by the Autorité des marchés financiers under n° GP 97 138 and registered with ORIAS (www.orias.fr) under no. 25003045 since 11/04/2025. Public Limited Company (Société Anonyme) with share capital of €3,871,680, RCS Paris n° 388 555 021, Crédit Mutuel Asset Management is a subsidiary of Groupe La Française, the asset management holding company of Crédit Mutuel Alliance Fédérale.