The Federal Reserve cut its benchmark interest rate by 0.25 percentage points on September 17, 2025, lowering the rate to a range between 4.00% and 4.25%. This was the first rate cut since December 2024 and comes as the Fed responds to a weakening labor market amid rising inflation and the economic effects of President Trump's tariffs. Fed Chair Jerome Powell described the move as a "risk-management cut" aimed at addressing increasing risks related to employment, which has shown signs of softening, while inflation remains above the Fed's 2% target.

Eleven of the 12 voting Federal Open Market Committee (FOMC) members supported the cut; the sole dissent came from Fed Governor Stephen Miran, who advocated a larger 0.5 percentage point cut. The Fed faced internal divisions, with some officials viewing the inflationary impact of tariffs as temporary, while others worried about persistent inflation and labor market weakness. Powell emphasized that future policy decisions would be data-driven and taken on a meeting-by-meeting basis.

ALSO READ: US stock market futures rise today after Fed rate cut with Dow, S&P 500 and Nasdaq hit record highs — top pre-market gainers and losers to watch today

The rate reduction signals the Fed's intent to support economic growth by easing borrowing costs while maintaining vigilance over inflation. Despite rate cuts, borrowing costs for consumers might not immediately decline significantly due to factors such as a nationwide housing shortage and elevated mortgage rates. Credit card and auto loan rates may ease modestly over time.

Market reaction to the rate cut was mixed, with some volatility as investors weighed the Fed’s cautious stance alongside expectations for additional rate cuts in 2025. Inflation risks remain a concern, and there is uncertainty about the pace and magnitude of future easing. Overall, the Fed is balancing efforts to bolster the labor market without letting inflation spiral higher, in a challenging economic environment influenced by trade tensions and political pressures.

The Federal Open Market Committee (FOMC) projections released in September 2025 indicate a median expectation of two more 25 basis point rate cuts before the end of the year, potentially lowering the federal funds rate to between 3.5% and 3.75%. The projections also forecast annual economic growth of around 1.6% for 2025 and an unemployment rate of 4.5%.

However, there is notable division among Fed officials regarding the path forward:

• Nine voting and nonvoting members support two additional rate cuts this year.
• Six members prefer to keep rates unchanged for the remainder of 2025.
• Two officials favor one more rate cut.
• One member advocates a rate hike.
• Another calls for a substantial 1.25 percentage point reduction, equivalent to five cuts of the recent size.

Several officials expressed concerns that rate cuts could exacerbate inflation pressures caused by tariffs, even as the labor market shows signs of weakening. The Fed is navigating a complex tradeoff between supporting employment and avoiding inflation acceleration fueled by trade-related price increases.

This division reflects the unusual economic environment the Fed faces, with competing risks from a slowing labor market and persistent inflation. The projections suggest a cautious approach to easing monetary policy, with future decisions likely to depend heavily on incoming economic data and inflation trends.

As Fed signals 2 more rate cuts this year - here's what investors should take note, according to analysts:

• The Federal Reserve cut rates by 25 basis points, marking the first rate reduction in 2025, and signaled two additional cuts expected later this year, potentially bringing the benchmark rate to between 3.5% and 3.75% by December.
• Economic forecasts showed the Fed raised growth projections slightly but noted increased downside risks related to the labor market, focusing on weakening employment as a key driver for easing.
• Analysts highlight that the Fed’s dovish stance has sparked optimism on Wall Street, with S&P 500 targets being raised amid a strong corporate earnings backdrop and an AI investment boom fueling growth.
• There’s a division among Fed officials: most anticipate more cuts this year, but some advocate caution due to persistent inflation risks and rising inflation expectations.
• Fed Chair Jerome Powell emphasized a "meeting-by-meeting" approach, warning the path of policy isn't predetermined and depends heavily on incoming economic data.
• Investors should watch employment data closely, as further labor market weakness could prompt additional cuts, while inflation surprises could temper the easing cycle.
• Market optimism is balanced with caution, as the Fed aims to support growth without igniting inflation or destabilizing the labor market.

What are the potential impacts of further Fed rate cuts on US stock market

Further Federal Reserve rate cuts could have several potential impacts on the U.S. stock market:

• Boost to Equity Prices: Lower interest rates reduce borrowing costs for companies and consumers, which may lead to increased corporate investment, higher earnings, and greater consumer spending, all supportive of equity prices. Historically, the stock market tends to rally following rate cuts, especially in growth-sensitive sectors like technology, consumer discretionary, and financials.
• Improved Market Sentiment: Rate cuts are often interpreted as the Fed's commitment to support economic growth, which boosts investor confidence and risk appetite, driving major indexes higher.
• Sector Rotation: Rate cuts can favor cyclical and interest rate-sensitive sectors such as real estate, homebuilding, financials, and consumer discretionary, while sometimes weighing on safe-haven sectors like utilities and consumer staples.
• Increased Volatility: While initial reactions tend to be positive, markets may also experience volatility if cuts are seen as a sign of economic weakness or if inflation concerns persist. Divisions within the Fed and uncertainty about future policy trajectories can add to market swings.
• Influence on Yield Curve: Rate cuts can flatten or steepen the yield curve, influencing banking sector profits and stock valuations more broadly.
• Potential Inflation Concerns: If rate cuts fuel inflation beyond target ranges, concerns over long-term economic stability could temper stock gains.

Overall, further Fed rate cuts are commonly seen as supportive of U.S. equities in the near term, particularly if accompanied by steady economic fundamentals, but investors should watch for risks related to inflation, economic data surprises, and Fed communication.

How do analysts forecast economic growth amid rate cuts

Analysts forecast economic growth amid Federal Reserve rate cuts with cautious optimism, emphasizing a delicate balance between supporting growth and controlling inflation:

• The Fed's economic outlook anticipates moderate growth with steady unemployment and slowing inflation, but officials are divided on the extent of rate cuts needed. Some foresee additional substantial cuts, while others urge caution due to inflation risks.
• Most economists predict a measured pace of rate reductions to sustain growth and employment rather than aggressive cuts, describing this as a "recalibration" to keep the economy stable.
• The Fed raised its GDP growth forecast for 2025 slightly to around 1.6%, reflecting expectations that rate cuts will help the economy, although inflation remains above target.
• Analysts highlight that slowing job growth and rising risks to employment motivated the rate cut decisions, and future cuts depend heavily on evolving labor market data and inflation trends.
• The Fed's path is uncertain, with policy decisions being taken on a meeting-by-meeting basis, making forecasts less predictable and subject to change based on real-time data.
• Market expectations are mixed, with futures pricing in several rate cuts through the end of 2025 and into 2026, but some analysts caution that the Fed may adopt a more cautious or balanced approach.

What historical stock gains followed previous Fed rate reductions

Historical data shows U.S. stocks generally perform well following Federal Reserve rate reductions, though outcomes vary depending on the economic context:

• Since 1980, there have been 11 Fed rate cut cycles. In the 12 months after the first rate cut, the S&P 500 averaged a gain of about 14.1%, with positive returns observed also at 3 and 6 months following cuts. Stock gains tend to be stronger when rate cuts occur during economic expansion rather than recession.
• During expansionary periods, rate cuts have led to consistent equity gains: 6.79% average increase in the S&P 500 and 8.27% in the Nasdaq over 6 months, and a 25.33% return in Nasdaq over 12 months after the first cut. Growth stocks, especially in technology, tend to outperform during these phases.
• In recessionary environments, stocks initially may decline after rate cuts due to economic uncertainty, but tend to recover with positive trends emerging around 150 days later. Performance tends to be more volatile in such cycles.
• Historical patterns suggest rate cuts reduce borrowing costs, stimulate investment and consumer spending, and improve corporate earnings outlooks, which feeds into rising stock prices. However, if rate cuts signal severe economic troubles, markets can remain volatile.
• Analyst commentary around the recent 2025 rate cut highlights expectations for a "soft landing," where the Fed manages inflation without recession, providing a constructive backdrop for stocks to rally broadly.
• Stocks sensitive to domestic economic cycles, such as financials, home construction, materials, and small-cap stocks, historically benefit from easing rate environments following cuts.