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Fed Holds Firm on Rates, Dashing Hopes for Cuts in 2025
5 Sep
Summary
- Fed refrains from additional rate cuts in 2025 due to inflation concerns
- Unemployment at 4.2% and rising, putting pressure on the Fed
- Morgan Stanley predicts two rate cuts in 2025 and quarterly cuts in 2026
As of September 5th, 2025, the Federal Reserve has refrained from additional interest rate cuts this year, despite rising unemployment concerns. After reducing rates last September, November, and December, Fed Chairman Jerome Powell has held firm, worried that further cuts could fuel inflation as the Trump administration's tariffs kick in.
The latest inflation data suggests Powell's concerns are warranted, with prices continuing to rise. However, the job market is also worrisome, with unemployment at 4.2% and at risk of climbing higher. The Fed's mandate is to balance inflation and unemployment, leaving it in a delicate position.
Most experts now expect the Fed to finally lower interest rates when it meets on September 17th, 2025, and many predict additional cuts throughout 2026. According to Morgan Stanley, the investment bank foresees two rate cuts in 2025 and quarterly reductions in 2026, bringing the Federal Funds Rate down to a range of 2.75% to 3% from the current 4.25% to 4.5%.
If these predictions hold true, it could have a significant impact on the stock market. Historically, the S&P 500 has performed much better during periods of Fed rate cuts than when the central bank is neutral or increasing rates.
