Barclays Accelerates Fed Rate Cut Forecast to September 2025 Amid Softening Labour Market

Expectations for Federal Reserve interest rate cuts have intensified in recent weeks, with several prominent financial institutions revising their forecasts to anticipate an initial reduction as early as September 2025. This shift reflects growing concerns over labour market softness and persistent inflationary pressures, prompting analysts to reassess the timing of monetary policy easing. As the US economy navigates a delicate balance between growth and price stability, these updated projections could have profound implications for asset markets, borrowing costs, and broader economic activity.

Evolving Forecasts for Fed Policy

Analysts at major banks have increasingly converged on the view that the Federal Reserve may begin lowering its benchmark interest rate in September 2025, a notable acceleration from earlier predictions that pointed to December or even later. This adjustment stems from recent economic indicators suggesting a cooling jobs market and moderating inflation, which together bolster the case for pre-emptive action to support employment without reigniting price pressures.

According to data from the CME FedWatch Tool, as of 22 August 2025, market participants are pricing in a high probability of a 25 basis point cut at the Federal Open Market Committee’s (FOMC) meeting scheduled for 16–17 September 2025. Probabilities for this move stand at around 70–80%, depending on the source, with some models indicating odds as high as 99.9% for at least some form of easing. This contrasts sharply with sentiments from just a month prior, when the likelihood of a September cut was considerably lower, hovering below 50% in many estimates.

Historical context underscores the significance of this pivot. The Fed’s benchmark rate, last recorded at 4.50% as per Trading Economics data updated on 22 August 2025, has remained steady following a series of hikes aimed at curbing inflation that peaked in 2022. Previous FOMC projections, such as those from the June 2025 dot plot, anticipated gradual cuts totalling 100 basis points through the year, but recent labour data has accelerated expectations. For instance, nonfarm payrolls have averaged around 73,000 additions per month in recent reports, well below the levels needed to absorb new workforce entrants, while unemployment has ticked up to 4.2%.

Key Drivers Behind the Shift

Several factors are driving this recalibration. First, inflation metrics have shown signs of easing, with core Consumer Price Index (CPI) at 2.9% year-over-year, approaching the Fed’s 2% target but still elevated in services sectors. Headline CPI stands at 2.7%, influenced by volatile energy prices, yet persistent “sticky” inflation in areas like housing and wages has kept policymakers cautious.

Labour market dynamics play a pivotal role. Federal Reserve Chair Jerome Powell, in recent commentary, has highlighted “downside risks” to employment, noting that weakening job growth could necessitate earlier intervention. This sentiment aligns with analyst models, such as those from J.P. Morgan, which brought forward their rate cut forecast to September 2025 citing labour market weakness and policy uncertainties. Reuters reported on 8 August 2025 that J.P. Morgan now expects a 25 basis point reduction, reflecting broader market unease.

Moreover, external pressures, including potential tariffs and geopolitical tensions, add layers of complexity. Forbes noted on 16 August 2025 that while rate cuts are anticipated, resurgent inflation could complicate the Fed’s path, potentially limiting the extent of easing to 50–75 basis points by year-end rather than the more aggressive 100 basis points some had hoped for.

Implications for Markets and the Economy

A September rate cut could ripple through financial markets in multifaceted ways. Lower borrowing costs typically boost equity valuations by reducing discount rates in valuation models, potentially supporting sectors sensitive to interest rates such as real estate and utilities. However, if the cut is perceived as a response to economic weakness, it might trigger volatility, as seen in past cycles where premature easing led to inflationary rebounds.

Investor sentiment, as gauged from credible sources like Morningstar’s updated forecasts from 26 June 2025, suggests four key takeaways: a likely 25 basis point cut in September, followed by gradual reductions; persistent inflation risks; labour market monitoring as a primary trigger; and potential for policy recalibration based on incoming data. Charles Schwab’s analysis from 30 July 2025 indicated that while rates were held steady then, the door was open for cuts later in the year, a view now seemingly validated by evolving data.

From a modelling perspective, analyst-led forecasts vary. For example, a consensus from 105 economists surveyed in July 2025, as reported by various outlets, showed 56 expecting a 25 basis point cut in September, with about two-thirds anticipating one or two cuts total for the year. Long-term predictions from the Fed’s own calendars, accessible via the Federal Reserve Board’s website updated on 22 August 2025, point to a benchmark rate potentially settling at 3.25–3.50% by end-2025, implying cumulative cuts of 100–125 basis points.

Sentiment from Market Participants

Sentiment among traders and analysts, as reflected in posts found on X (formerly Twitter), leans heavily towards expecting a cut, with probabilities for a 25 basis point move in September ranging from 57.5% to 80.3% in recent updates. Some users highlight the risk of a larger 50 basis point cut if job data deteriorates further, though caution prevails due to inflation concerns. This aligns with broader verified sentiment from sources like USA Today, which on 22 August 2025 reported Powell signaling a likely September cut amid job market risks.

India Today’s coverage from the same date echoed this, noting that Powell’s comments place significant emphasis on upcoming jobs and inflation reports before the September meeting. Reuters, in a 21 August 2025 article, captured Fed officials’ lukewarm stance on an immediate cut, yet markets remain geared for action, with investor expectations at 92% for a 25 basis point reduction.

Potential Risks and Outlook

While the case for a September cut strengthens, risks abound. If inflation ticks up unexpectedly—perhaps due to supply chain disruptions or fiscal policies—the Fed might delay, leading to market disappointments. Conversely, aggressive easing could overstimulate the economy, echoing the post-2008 era where low rates fuelled asset bubbles.

Looking ahead, the Jackson Hole symposium, ongoing as of 22 August 2025, may provide further clues from Powell’s address. Analyst models, such as those from U.S. Bank dated 4 May 2023 (providing historical context on Fed tapering), suggest that policy calibration will aim to keep inflation in check while supporting growth. FinancialContent’s report from 19 August 2025 reinforces high market expectations for a pivot, with probabilities nearing certainty.

In summary, the acceleration of rate cut forecasts to September 2025 underscores a Fed increasingly attuned to employment risks, potentially marking the start of a new easing cycle. Investors should monitor key data releases, including August employment figures due in early September, as these will be decisive. While opportunities arise from lower rates, the path forward demands vigilance amid economic uncertainties.

References

• FinancialContent. (2025, August 19). Federal Reserve poised for September rate cut amidst high market expectations and Powell’s Jackson Hole address. https://www.financialcontent.com/article/marketminute-2025-8-19-federal-reserve-poised-for-september-rate-cut-amidst-high-market-expectations-and-powells-jackson-hole-address
• Forbes. (2025, August 16). Fed expected to cut interest rates, though inflation may be picking up. https://www.forbes.com/sites/simonmoore/2025/08/16/fed-expected-to-cut-interest-rates-though-inflation-may-be-picking-up/
• India Today. (2025, August 22). Jerome Powell signals possible September rate cut, cites rising job market risks. https://indiatoday.in/amp/business/story/us-federal-reserve-chair-jerome-powell-signals-possible-september-rate-cut-cites-rising-job-market-risks-2775428-2025-08-22
• Morningstar. (2025, June 26). When will the Fed start cutting interest rates?. https://www.morningstar.com/markets/when-will-fed-start-cutting-interest-rates
• Reuters. (2025, August 21). Fed officials lukewarm on September rate cut; markets await Powell speech. https://www.reuters.com/sustainability/boards-policy-regulation/fed-officials-lukewarm-september-rate-cut-markets-await-powell-speech-2025-08-21/
• Reuters. (2025, August 8). J.P. Morgan brings forward Fed rate cut forecast to September. https://www.reuters.com/business/jpmorgan-brings-forward-fed-rate-cut-forecast-september-2025-08-08/
• Schwab. (2025, July 30). FOMC meeting update. https://www.schwab.com/learn/story/fomc-meeting
• Trading Economics. (2025, August 22). United States interest rate. https://tradingeconomics.com/united-states/interest-rate
• U.S. Bank. (2023, May 4). Federal Reserve tapering: What it means for markets. https://www.usbank.com/investing/financial-perspectives/market-news/federal-reserve-tapering-asset-purchases.html
• USA Today. (2025, August 22). Fed’s Powell signals likely September rate cut amid job market risks. https://www.usatoday.com/story/money/2025/08/22/fed-powell-september-rate-cut/85768429007/
• Federal Reserve Board. (2025, August 22). Meeting calendars and information. https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
• CNBC. (2025, July 30). Fed leaves interest rates unchanged, as expected. https://www.cnbc.com/2025/07/30/fed-leaves-interest-rates-unchanged-as-expected.html