Federal Reserve Signals Cautious Rate Cuts Amid Economic Slowdown

Federal Reserve Chair Jerome Powell and Governor Christopher Waller have signaled a shift toward monetary policy easing, with a 25 basis point rate cut likely at the September 16-17, 2025, meeting. Waller explicitly endorsed the move, stating, “Based on what I know today, I would support a 25 basis point cut” [Reuters, August 28, 2025]. Powell, speaking at the Jackson Hole symposium, noted rising labour market risks, saying, “The labor market appears to be in balance, but downside risks to employment are rising” [Reuters, August 23, 2025]. Both cite a sharp slowdown in job growth to 35,000 monthly since May, alongside a stable unemployment rate of 4.2%, as key drivers for action.

Waller anticipates further cuts over the next three to six months to guide the policy rate toward a neutral 3%, down from 4.25%-4.50%. “I fully expect more rates cuts as the labor market continues to soften,” he said [Reuters, August 28, 2025]. Powell echoed this cautious approach, noting that inflation, while above the Fed’s 2% target, is manageable, with tariff-related pressures expected to be short-lived. “It is also possible, however, that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic,” he cautioned [Reuters, August 23, 2025]. The August jobs report, due September 5, will be pivotal in determining the pace of cuts, with both officials emphasising a data-driven strategy.

The Fed’s dovish tilt has lifted market expectations, with traders assigning an 85% probability to a September cut and anticipating another by December. “Chair Powell came in more dovish than expected,” said Thomas Hayes of Great Hill Capital [Reuters, August 23, 2025]. This could bolster U.S. equities, particularly in the S&P 500, as lower rates reduce borrowing costs. However, hawkish voices like Kansas City Fed President Jeffrey Schmid highlight ongoing inflation concerns, suggesting potential internal debates. Global markets will focus on upcoming labour and inflation data to assess the Fed’s trajectory, with tariff policies adding uncertainty. The Fed’s gradual approach aims to stabilise growth while guarding against inflationary risks.