September 2025: The Turn

The First Cut

On September 17, the FOMC cut rates by 25 basis points to 4.00%–4.25% — the first reduction since December 2024 and a decisive acknowledgment that the balance of risks had shifted. The vote was 11-1, with Governor Miran dissenting in favor of a larger 50 basis point move.

Powell described the decision as a "risk management" move, driven by a labor market that was no longer merely cooling but actively softening. The unemployment rate had edged up to 4.4% — its highest since October 2021. Nonfarm payrolls showed +119,000 jobs, and Powell noted that "the recent pace of job creation appears to be running below the break-even rate needed to hold the unemployment rate constant."

The Projections Tell the Story

The updated Summary of Economic Projections revealed a committee grappling with crosscurrents:

September 2025 SEP — Median Projections

Dot Plot Distribution — Year-End 2025 Rate

The gap between the inflation and employment projections was striking. The Fed was cutting into an environment where inflation remained above target — a calculated bet that labor market deterioration posed a greater threat than price persistence.

The Tariff Tax

The macro backdrop made the decision more complex than any textbook would suggest. The average effective U.S. tariff rate stood at approximately 18.6% — the highest since 1933. New 2025 tariffs had raised roughly $88 billion in revenues, but at a cost the Yale Budget Lab estimated at $2,400 per household in short-run income losses.

U.S. Effective Tariff Rate — Historical Context

Tariffs created a peculiar policy challenge: they were simultaneously inflationary (raising consumer prices) and contractionary (reducing real incomes and dampening demand). The FOMC's September statement acknowledged this tension by noting that "uncertainty about the economic outlook has increased."

Global Divergence

The global policy landscape was fragmenting. The ECB had been cutting rates since mid-2025, with the eurozone growing at a modest 1.4%. China's GDP had grown 5.3% in the first half, driven by exports and fiscal stimulus, but domestic demand remained weak — headline inflation averaged 0% for the year and the GDP deflator continued declining, raising the specter of a deflationary trap.

Global Policy Rate Snapshot — September 2025

Japan represented the mirror image: the BOJ had raised rates to 0.5% in January and was signaling further tightening. After nearly four years of above-target inflation, Japan was finally normalizing — just as the rest of the developed world began easing.

The Paradox of Q3 GDP

Markets would later learn that Q3 GDP grew at a robust 4.3% annualized rate — one of the strongest quarters of the expansion. Consumer spending remained resilient even as the labor market softened. This paradox — strong growth alongside rising unemployment — challenged simple recession narratives and suggested that the economy was undergoing a structural rotation rather than a cyclical downturn.

What September Means

September 2025 was a turning point, but not necessarily the beginning of an aggressive easing cycle. Powell's measured language, the single 25 bps move, and the wide dispersion in the dot plot all signaled a Fed that was adjusting course without committing to a destination. The committee was data-dependent in the truest sense — not because it lacked conviction, but because the data itself was sending conflicting signals.