FOMC Preview: 25bps Rate Cut Expected

Most analysts expect the FOMC the reduce the Fed Funds rate by 25bps at the meeting this week, to a target range of 4 to 4 1/4 percent. Market participants currently expect the FOMC to also cut rates an additional 25bps at both the October and December meetings.

From BofA:

We expect the Fed to cut rates by 25bp to 4.0-4.25% at its September meeting. We look
for two changes in the description of current conditions in the first paragraph of the
FOMC statement. The reference to swings in net exports should be removed, though
some version of the text saying “growth of economic activity moderated in the first half
of the year” will probably stay. More importantly, the description of labor market
conditions is likely to be downgraded. The FOMC might opt for language similar to last
September: “Job gains have slowed, and the unemployment rate has moved up but
remains low.”
…

The economic forecasts from the June SEP have aged remarkably well. Growth could get
marked up by a tenth for this year, but the out years should stay roughly unchanged. We
don’t see any need to tinker with the path of the unemployment rate, since it is on track
to reach the Fed’s 4Q projection of 4.5%.
emphasis added

Projections will be released at this meeting. For review, here are the June projections.

Since the last projections were released, economic growth, the unemployment rate and inflation all have been close to expectations.

The BEA’s estimate for first half 2025 GDP showed real growth at 1.4% annualized. Most estimates for Q3 GDP are around 1.7%. That would put the real growth for the first three quarters at 1.5% annualized – at the top of end of the June projections. It is possible the FOMC will revise up Q4 2025 GDP growth slightly.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP¹
Projection Date	2025	2026	2027
Jun 2025	1.2 to 1.5	1.5 to 1.8	1.7 to 2.0
Mar 2025	1.5 to 1.9	1.6 to 1.9	1.6 to 2.0

¹ Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 4.3% in August. The unemployment rate will likely increase further this year, and it is possible the FOMC will revise up the Q4 2025 unemployment rate slightly.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate²
Projection Date	2025	2026	2027
Jun 2025	4.4 to 4.5	4.3 to 4.6	4.2 to 4.6
Mar 2025	4.3 to 4.4	4.2 to 4.5	4.1 to 4.4

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of July 2025, PCE inflation increased 2.6% year-over-year (YoY), unchanged from 2.6% YoY in June. There will likely be some further increases in the 2nd half of 2025, but the forecast range is probably reasonable.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation¹
Projection Date	2025	2026	2027
Jun 2025	2.8 to 3.2	2.3 to 2.6	2.0 to 2.2
Mar 2025	2.6 to 2.9	2.1 to 2.3	2.0 to 2.1

PCE core inflation increased 2.9% YoY in July, up from 2.8% YoY in June. There will likely be further increase in core PCE inflation, but the projections will likely remain mostly the same.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation¹
Projection Date	2025	2026	2027
Jun 2025	2.9 to 3.4	2.3 to 2.7	2.0 to 2.2
Mar 2025	2.7 to 3.0	2.1 to 2.4	2.0 to 2.1