Fed’s Waller Backs 25bps September Rate Cut Amid Cooling Inflation and Rising Unemployment

Federal Reserve Governor Christopher Waller’s recent remarks have spotlighted the growing case for a measured adjustment in U.S. monetary policy, with a potential 25 basis point reduction in interest rates at the September 2025 Federal Open Market Committee (FOMC) meeting emerging as a focal point for investors and economists alike.

The Case for a September Rate Cut

As the U.S. economy navigates a landscape of moderating inflation and evolving labour market dynamics, signals from key Federal Reserve officials suggest a shift towards easing monetary policy. Waller’s indication of support for a quarter-percentage-point cut aligns with broader expectations that the Fed may begin dialling back its restrictive stance to support growth without reigniting price pressures. This comes against a backdrop where the benchmark federal funds rate has been held at 4.25% to 4.50% since December 2024, following a series of hikes aimed at curbing inflation that peaked in mid-2022.

Recent economic indicators underpin this pivot. Inflation, as measured by the Personal Consumption Expenditures (PCE) price index, has eased towards the Fed’s 2% target, with core PCE registering 2.6% year-over-year in June 2025. Labour market conditions, while still robust, show signs of softening: the unemployment rate ticked up to 4.1% in July 2025, and job gains have averaged around 170,000 per month in the first half of the year, down from over 250,000 in 2024. These trends suggest the economy is cooling sufficiently to warrant policy normalisation, avoiding the risk of overtightening that could tip the U.S. into recession.

Waller’s perspective echoes sentiments from other Fed officials, including Chair Jerome Powell, who at the Jackson Hole symposium in August 2025 highlighted rising risks to employment amid progress on inflation. Market participants, pricing in futures contracts, now assign over 70% probability to a 25 basis point cut in September, according to data from the CME FedWatch Tool as of late August 2025. This consensus reflects a cautious approach, with analysts at firms like J.P. Morgan and Goldman Sachs forecasting a sequence of gradual reductions totalling 75 to 100 basis points by year-end, contingent on incoming data.

Implications for Financial Markets

A 25 basis point cut, if implemented, would mark the first easing since the Fed’s aggressive hiking cycle began in March 2022. For equity markets, this could provide a tailwind by lowering borrowing costs and boosting corporate profitability. Historically, initial rate cuts have coincided with positive stock performance, as seen in the 2019 cycle when the S&P 500 rallied 10% in the three months following the first reduction. However, the magnitude matters: a modest 25 basis point move signals confidence in the economy’s resilience, potentially avoiding the panic that a larger 50 basis point cut might imply.

Bond markets stand to benefit directly, with yields on 10-year Treasuries already declining to around 3.8% in August 2025 from highs above 4.5% earlier in the year. Lower rates could compress spreads in corporate debt, encouraging issuance and refinancing. Yet, investors should temper enthusiasm; if labour data weakens further—such as in the upcoming August jobs report due on 5 September 2025—calls for a more aggressive cut could resurface, introducing volatility.

In the currency sphere, a dovish Fed might pressure the U.S. dollar, which has weakened 5% against a basket of major currencies since July 2025. This could aid exporters but complicate import-dependent sectors. Emerging markets, often sensitive to U.S. rate differentials, may see inflows as carry trades unwind, though global divergences—such as the European Central Bank’s own easing path—add layers of complexity.

Broader Economic Context and Risks

The Fed’s deliberations occur amid a global slowdown, with U.S. GDP growth projected at 2.0% for 2025 by the International Monetary Fund, down from 2.5% in 2024. Consumer spending remains a pillar, supported by wage gains outpacing inflation, but high household debt levels—totalling $17.5 trillion as of Q2 2025—pose vulnerabilities if rates stay elevated too long.

Analysts at Barclays and Deutsche Bank, in reports from August 2025, have pivoted to forecasting a September cut, citing Powell’s labour market warnings. They anticipate two to three reductions in 2025, with greater uncertainty in the latter half. This outlook is model-based: econometric forecasts from Trading Economics suggest the fed funds rate could fall to 4.00% by end-2025, assuming inflation stabilises and unemployment holds below 4.5%.

Risks abound. A resurgence in inflation, perhaps from supply chain disruptions or geopolitical tensions, could force the Fed to pause. Conversely, a sharper labour market downturn—evidenced by rising jobless claims, which averaged 235,000 weekly in July 2025—might necessitate faster easing. Waller’s comments underscore a data-dependent approach, with the August employment figures pivotal in determining the cut’s size.

Sentiment from Credible Sources

Market sentiment leans optimistic, as per Reuters polls in August 2025, where 56 of 105 economists expect a 25 basis point September cut, with two-thirds anticipating one or two more by year-end. Forbes, in a January 2025 analysis, projected similar easing, noting uncertainty post-midyear. Charles Schwab’s July 2025 commentary highlighted the Fed’s door-opening for cuts, fostering bullish investor positioning.

Dry humour aside, the Fed’s balancing act resembles a tightrope walker eyeing both inflation cliffs and recession pits—opt for 25 basis points, and it might just steady the wobble without a dramatic fall.

Investor Strategies and Forward Outlook

For investors, positioning ahead of September involves diversification. Rate-sensitive sectors like real estate and utilities could outperform, with REIT indices up 8% year-to-date as of August 2025. Cyclicals, including financials, may see mixed effects: lower rates ease net interest margins but support lending volumes.

Longer-term, the Fed’s dot plot from the July 2025 meeting projected a median fed funds rate of 4.1% by end-2025, implying three cuts. If realised, this could sustain the soft landing narrative, with S&P 500 earnings growth forecasted at 12% for 2026 by FactSet models.

In summary, a 25 basis point cut in September represents a prudent step towards neutral policy, calibrated to economic realities. While not a panacea, it signals the Fed’s adaptability, potentially paving the way for sustained expansion. Investors would do well to monitor labour and inflation data closely, as these will dictate the pace of future moves.

References

• Federal Reserve. (2024, December 18). Monetary Policy Statement. https://www.federalreserve.gov/newsevents/pressreleases/monetary20241218a.htm
• Federal Reserve. (2025, July 30). Monetary Policy Statement. https://www.federalreserve.gov/monetarypolicy/monetary20250730a.htm
• Federal Reserve. (2025, August 26). Monetary Policy Statement. https://federalreserve.gov/newsevents/pressreleases/monetary20250826a.htm
• Federal Reserve. (n.d.). FOMC Meeting Calendar. https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
• Financial Express. (2025, August). FOMC Meeting: Why a September Rate Cut Looks Likely and What Could Stop It. https://financialexpress.com/business/investing-abroad-fomc-meeting-why-a-september-rate-cut-looks-likely-and-what-could-stop-it-3959854
• Forbes. (2025, January 5). Here’s The Fed’s 2025 Meeting Schedule and What To Expect for Interest Rates. https://www.forbes.com/sites/simonmoore/2025/01/05/heres-the-feds-2025-meeting-schedule-and-what-to-expect-for-interest-rates/
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• MarketMinute. (2025, August 25). Federal Reserve Hints at September Rate Cut Amid Job Market Concerns. https://markets.financialcontent.com/wral/article/marketminute-2025-8-25-federal-reserve-hints-at-september-rate-cut-amid-job-market-concerns
• MarketMinute. (2025, August 26). Federal Reserve Poised for September Rate Cut: A Market-Shaping Decision Looms. https://markets.financialcontent.com/wral/article/marketminute-2025-8-26-federal-reserve-poised-for-september-rate-cut-a-market-shaping-decision-looms
• MarketMinute. (2025, August 27). Federal Reserve Signals September Rate Cut, Igniting Market Optimism and Uncertainty. https://markets.financialcontent.com/wral/article/marketminute-2025-8-27-federal-reserve-signals-september-rate-cut-igniting-market-optimism-and-uncertainty
• Reuters. (2025, August 25). Major Brokerages Pivot to Sept Fed Rate Cut Following Powell’s Labour Warning. https://www.reuters.com/business/major-brokerages-pivot-sept-fed-rate-cut-powells-labor-warning-2025-08-25/
• Schwab. (2025, July). FOMC Meeting Commentary. https://www.schwab.com/learn/story/fomc-meeting
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