FOMC Lowers Interest Rates at September 2025 Meeting

The economic tide has shifted since the June FOMC meeting, and committee members responded to the incoming data by reducing interest rates at the September 16^th and 17^th meeting. This marked the first interest rate cut since December 2024.

The following summary covers the data behind the interest rate decision as well as the committee’s updated projections. These forecasts showcase members’ expectations for the economy and the future of interest rates for the next several years.

The FOMC Lowered Interest Rates

The FOMC reduced the Fed Funds Rate from a target range of 4.25 – 4.50% to a range of 4.00 – 4.25%. This marked the first reduction in interest rates since the three cuts last year.

The changing economic situation was a key driver of the interest rate decision – including a weakening labor market and slower economic growth. These changes also influenced updates to the committee’s forecasts.

Updated Economic Forecasts

Compared to the June projections, forecasts show a brighter outlook for GDP along with lower interest rates for the remainder of 2025. Committee members left their short-term expectations for unemployment and inflation unchanged from the prior estimates, and both measures show a worsening outlook in these areas compared to the current situation.

Economic Growth Expected to Strengthen

The economic forecasts show Gross Domestic Product [GDP] rising by 1.6% this year, 1.8% next year, and 1.9% the following year. For reference, the June projections predicted a GDP growth rate of 1.4% for 2025, then 1.6% in 2026 and 1.8% in 2027. This indicates a slightly improved picture of the economy going forward when compared to the June outlook.

GDP made headlines earlier in the year when it fell by 0.5% in the first quarter. This decline was attributed to increased imports ahead of tariffs. Then, GDP recovered and grew by 3.3% in the second quarter, bringing the growth rate for the first half of the year to around 1.5%. Therefore, GDP is expected to remain relatively stable throughout the remainder of the year based on the FOMC’s projections.

Unemployment Projected to Rise This Year

The FOMC forecasts that unemployment will rise from the current level of 4.3% to 4.5% by the end of the year. The committee then expects this rate to decline to 4.4% next year and 4.3% the following year.

Leading up to the forecast, the August data showed that the unemployment rate rose to 4.3%, the highest since October 2021. Chair Powell noted that both the supply and demand for labor have declined, which is unusual. He suggested that lower immigration and a reduction in the labor force participation rate have put downward pressure on the supply side of the equation, while employers are also demanding less labor.

Along with the headline unemployment number, other changes in the labor market have stoked concerns. Significant downward revisions to data made headlines and prompted the removal of the top official in August. Further, a downward revision to June’s unemployment numbers made the case for the first decline in employment since the COVID-19 pandemic.

Inflation Expected to Rise Slightly This Year

The FOMC held their projection steady for inflation in 2025 at 3.0%, which would suggest higher prices throughout the remainder of the year. Then, the committee expects inflation to decline to 2.6% next year and 2.1% the following year.

As Chair Powell noted, the inflation rate has risen throughout 2025. The annual increase in the Personal Consumption Expenditures [PCE] Price Index rose from 2.2% to 2.4% in May. Then, it rose to 2.6% in June and remained at that rate in July – the most recent month for which data is available. The forecast shows that prices could continue to rise throughout the rest of the year.

The chart below summarizes the changes to FOMC projections.

The Future of Interest Rates

The final piece of the FOMC’s forecast shows an expected year-end Fed Funds Rate of 3.6% – down from 3.9% in the June projections. This suggests two additional quarter-point rate cuts this year, or one larger cut.

Following the FOMC meeting, markets adjusted quickly, and expectations for the Fed Funds Rate now largely concur with the Fed’s projected path. The CME FedWatch tool, which tracks Fed Funds futures prices, suggests a year-end Fed Funds target range of 3.50 – 3.75%.

Overall, business leaders can interpret the FOMC’s projections as a sign that the labor market is likely to weaken throughout the remainder of the year while prices rise. These changes are expected to be accompanied by lower interest rates, but the Fed will continue to determine the course of monetary policy based on incoming economic data.

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