Market sentiment is increasingly tilting toward a U.S. Federal Reserve interest rate cut in September 2025, with traders now assigning as much as an 85% probability to such an outcome.
This shift follows Federal Reserve Chair Jerome Powell’s testimony on Tuesday, in which he emphasized the central bank’s cautious stance and its intent to closely observe how tariffs imposed by President Donald Trump might influence economic conditions.
Data from the CME FedWatch Tool reflects growing expectations that the Fed will adjust its policy rates later in the year. Markets now place odds of a half-point rate reduction at 15% for September, while the likelihood of a more modest quarter-point cut stands at 70%. Conversely, expectations for any move in July remain muted, with 81% believing the Fed will keep its benchmark rate steady within the 4.25-4.50% range.
Chair Powell, addressing lawmakers in Congress, warned that recently introduced tariffs could begin exerting upward pressure on prices as soon as this summer—a timeframe central to the Fed’s deliberations over future rate decisions. In response to questions from Republican members of the House Financial Services Committee—some echoing President Trump’s calls for swifter rate cuts—Powell reiterated the Fed’s view that inflation may soon accelerate and signaled no urgency to reduce borrowing costs in the interim.
Powell explained that the officials anticipate signs of tariff-driven price increases emerging in the June and July inflation data. Should these pressures not materialize, the Fed remains open to the possibility that their pass-through to consumers will be less pronounced than initial estimates. But if inflation does tick higher, it will factor significantly into its policy calculus.
