Barclays Predicts Two 25bps Fed Rate Cuts in September and December 2025 Amid Cooling Inflation

As the Federal Reserve navigates a complex economic landscape marked by moderating inflation and evolving labour market dynamics, expectations are mounting for a measured easing of monetary policy in the latter half of 2025. Analysts increasingly anticipate a 25 basis point reduction in interest rates at the September meeting, followed by another similar cut in December, reflecting a cautious approach to supporting growth without reigniting inflationary pressures.

The Case for Rate Cuts in 2025

The rationale for these potential adjustments stems from a confluence of economic indicators that suggest the U.S. economy is cooling sufficiently to warrant policy relief. Inflation, as measured by the core Personal Consumption Expenditures (PCE) price index, has shown signs of easing towards the Fed’s 2% target, with recent data indicating a dip that aligns with a broader disinflationary trend. Meanwhile, the labour market, while resilient, has exhibited softening through rising unemployment rates and slower job growth, prompting concerns over a potential slowdown.

According to forecasts from major financial institutions, the Federal Open Market Committee (FOMC) is likely to initiate this easing cycle in September 2025 with a quarter-point cut, bringing the federal funds rate down from its current range. This move would be calibrated to address emerging risks in employment while maintaining vigilance on price stability. A follow-up cut in December could further entrench this trajectory, potentially setting the stage for a terminal rate in the 3–3.25% range by 2026, as suggested by some economist models.

Economic Indicators Driving the Outlook

Several key metrics underpin this outlook. For instance, recent inflation readings have been moderate, with core CPI hovering around levels that indicate sticky but manageable pressures in services. Unemployment has ticked up modestly, reaching figures that signal a labour market under strain but not in freefall. Nonfarm payroll additions have decelerated, averaging below historical norms, which heightens the case for preemptive action to avert a sharper downturn.

Historical context adds depth to this analysis. In previous cycles, such as the post-2008 recovery, the Fed employed gradual rate adjustments to foster sustainable growth. The current environment echoes elements of that era, with the added wrinkle of geopolitical uncertainties and potential tariff impacts that could complicate the inflation picture. Analysts project that without intervention, real GDP growth might undershoot the 2% mark in 2025, justifying the proposed cuts.

Market Implications and Investor Sentiment

The prospect of these rate cuts carries significant ramifications across asset classes. Equity markets, particularly in sectors sensitive to borrowing costs like technology and real estate, could see renewed vigour as lower rates reduce discount factors in valuation models. Fixed-income investors might anticipate a steepening yield curve, with shorter-term Treasuries benefiting from the policy shift.

Sentiment from credible sources reflects a consensus leaning towards optimism tempered by caution. A Reuters poll of economists, published on 15 August 2025, indicated that most expect a September cut followed by at least one more by year-end, with a base case of moderate easing. Similarly, Goldman Sachs economists, in a 7 July 2025 analysis, forecasted an earlier-than-expected start to cuts, potentially in September, aiming for a terminal rate of 3–3.25% in 2026. This sentiment underscores a view that the Fed’s actions could signal confidence in a soft landing, though risks of economic stress persist.

Commodity markets stand to gain as well, with undervalued assets potentially rebounding on the back of easier monetary conditions. A report from AInvest, dated 23 August 2025, highlighted how a September cut could act as a catalyst for global capital flows into commodities, given the 75–85% market-implied probability of a 25 basis point move.

Risks and Uncertainties

Yet, this path is not without pitfalls. Federal Reserve Chair Jerome Powell, in remarks on 22 August 2025, noted a high level of uncertainty, emphasising that conditions “may warrant” cuts but that the central bank would proceed carefully. Rising job-market risks and persistent inflation threats could alter the calculus, potentially leading to a more hawkish stance if data surprises to the upside.

Model-based forecasts illustrate this variability. For example, CME FedWatch Tool data as of late August 2025 shows probabilities of a 25 basis point cut in September exceeding 75%, with subsequent easing in December around 60%. However, aggressive scenarios, such as a 50 basis point cut, remain on the table if labour data weakens further, though they carry lower odds at present.

Sectoral and Broader Economic Impacts

Delving deeper, the anticipated cuts could disproportionately benefit interest-rate-sensitive industries. In housing, lower mortgage rates might spur demand, countering the affordability crunch that has plagued the sector since rates peaked. Consumer spending, a cornerstone of U.S. growth, could receive a boost as borrowing costs decline, particularly for durable goods.

On the corporate front, firms with high debt loads would find relief in reduced interest expenses, potentially improving earnings outlooks. Analyst-led projections suggest that S&P 500 earnings growth could accelerate to 10–12% in 2026 under a scenario of two 25 basis point cuts in 2025, assuming no major exogenous shocks.

Globally, these moves reverberate beyond U.S. borders. Emerging markets, often tethered to Fed policy, might experience capital inflows as yield differentials narrow. However, if cuts are perceived as a response to weakness rather than strength, it could amplify volatility in currency markets.

Historical Parallels and Long-Term Trends

Looking back, the Fed’s rate-cutting cycles have often preceded periods of economic expansion. The 2019 easing, for instance, helped avert a recession amid trade tensions. Today’s environment, with inflation cooling from 2022 highs, mirrors that preemptive strategy. Over the multi-year horizon, valuation metrics like the Shiller P/E ratio, historically averaging around 17, suggest equities could sustain gains if rates stabilise at lower levels.

That said, dry humour might note that central bankers, ever the cautious breed, prefer to err on the side of too little too late rather than risk the inflationary ghosts of the 1970s. This measured pace—25 basis points in September and December—embodies that philosophy, balancing dual mandates without overcommitting.

Strategic Considerations for Investors

For investors positioning ahead of these developments, diversification remains key. Allocating towards quality bonds and dividend-paying stocks could hedge against uncertainties, while monitoring incoming data—such as the next jobs report—will be crucial. If the Fed adheres to this script, the cuts could mark the beginning of a new phase in the economic cycle, one characterised by steady, if unspectacular, progress.

In summary, the expected Federal Reserve rate cuts in September and December 2025 represent a pivotal shift, calibrated to nurture growth amid lingering risks. While forecasts point to a controlled easing, the path forward hinges on evolving data, with profound implications for markets and the broader economy.

References

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