In a widely anticipated move, the Federal Reserve has slashed its benchmark interest rate by 25 basis points, bringing the federal funds rate to a target range of 4.00% to 4.25%.

The decision of the Federal Open Market Committee ( FOMC ), the policymaking body of the US Federal Reserve Board ( Fed ), announced following a two-day meeting, reflects growing concerns over a softening labour market and easing wage growth, even as inflation hovers near the Fed's 2% target. This is the first rate cut since December 18 2025 when the Fed cut rates by 25bps to a range of 4.25% to 4.50%.

In a news briefing, FOMC and Fed chairman Jerome Powell says," The unemployment rate edged up to 4.3% but remains little changed over the past year. While the unemployment rate remains low, it has edged up. Job gains have slowed and downside risks to employment have risen. At the same time, inflation has risen recently and remains somewhat elevated in support of our goals."

Powell also said there was no widespread support for a 50bps rate cut at  the FOMC meeting. While de did not explicitly say that there may be more rate cuts this year, projections by Fed officials indicated that they expect two more quarter-point rate cuts by the end of 2025, one more in October and one in December, if conditions allow.

Drawing from recent financial analyses, the rate cut aims to bolster consumer confidence and prevent the economy from slipping further, though experts warn of potential risks like renewed inflationary pressures or market overheating.

Before the announcement, the deVere Group, a global financial advisory firm, had called for a bolder 50bp reduction, highlighting the Fed's history of delayed responses.

Nigel Green, chief executive officer of deVere Group, stressed the need for proactive measures, noting: “The US central bank has little room for hesitation. The labour market is losing momentum, unemployment is at a four-year high, and wage growth is easing. A 25bp trim would leave policy trailing the reality on the ground.”

While the Fed opted for a smaller cut, Green's cautionary note resonates, as August payrolls fell short of expectations and unemployment hit 4.3%. The advisory firm now anticipates at least 75bp in total easing by year-end, signalling that this initial move might be the start of a more aggressive cycle if job data continues to weaken.

IG, high yields outperform

Bond markets have reacted positively to the cut, building on pre-meeting rallies. According to Nuveen's Weekly Fixed Income Commentary issued on September 15, US treasury yields were mixed last week amid hotter-than-expected inflation and labour weakness, but spread sectors like investment-grade corporates and high-yield bonds outperformed.

Anders Persson, chief investment officer of global fixed income at Nuveen, had also expected a 25bp cut. With the easing now in effect, Persson believes fixed income yields present attractive entry points, especially as tariffs compress consumer spending. Municipal bonds, in particular, saw yields decline, with new issuance light at US$5 billion this week, fostering strong investor demand.

Currency markets have also felt the dovish shift, pushing the US dollar near year-lows. Ipek Ozkardeskaya, senior analyst at Swissquote Bank, captured this dynamic in her outlook issued on September 17: “Activity on Fed funds futures, meanwhile, implies nearly a full 25bp cut today, around an 80% chance for another cut in October, and nearly a 75% chance for a third 25bp cut by December.”

Post-cut, her analysis holds, as the dollar index erased its summer rebound, boosting the sterling and the euro. Ozkardeskaya warns of potential disappointment if the Fed emphasizes inflation risks in its upcoming communications, potentially reviving concerns over political pressures or hidden economic frailties.

Meanwhile, gold consolidated gains on the softer dollar, while crude oil climbed to US$64 per barrel amid inventory declines.

PGIM’s macro view underscores the supportive yet risky nature of this easing path. In the Weekly View from the Desk issued on September 15, the firm adjusted scenarios to reflect a 40% probability of “Muddle Through” in the US, with Fed cuts potentially dipping into accommodative territory by 2026.

An analyst from the firm states: "The mounting likelihood of aggressive Fed easing, even amid sticky inflation, increases the probability of an ‘overheating’ scenario in the US ( about 25% ) with potential spillover to the global economy."

Buffer against downside risks

This highlights balanced risks: while the cut supports front-end carry and risk assets, widening credit spreads could thicken if inflation reaccelerates.

PGIM favours positions in senior CLO ( collateralized loan obligation ) tranches and high-quality securitized products, where all-in yields remain historically attractive.

Overall, the 25bp cut provides a buffer against downside risks, such as trade tensions from US tariffs and geopolitical flare-ups. Equity markets, led by tech, hit record highs before the rate cut, while emerging markets advanced with strong inflows.

However, analysts urge vigilance as consumer spending masks disparities, with wealthy Americans driving nearly half of it.

The Fed’s dot plot and future dissents will be key watchpoints. If growth momentum holds, this could secure the expansion; otherwise, bolder actions in the form of more rate cuts may follow. Investors should focus on carry-rich assets while hedging against overheating tails.