Fed’s First Rate Cut in 2025

18 Sep 2025 , 03:57 PM

The Federal Open Market Committee lowered the target range for the federal funds rate by ¼ percentage point to 4.00 % – 4.25 %, cut the interest rate paid on reserve balances to 4.15 %, and reduced the primary credit (discount rate) to 4.25 % (effective Sept 18, 2025). A moderating economic activity, slower job gains and rising unemployment were among the key reasons. To support the dual mandate of maintaining maximum employment and inflation at 2%, FOMC has taken the measure to cut the fed funds rate.

Key drivers of the ¼‑point cut

Labor‑market moderation – With slower job growth and a modest uptick in the unemployment rate, downside risk to employment has increased.

Elevated inflation – Price pressures have once again strengthened and are  preventing inflation expectations from firmly anchoring at the 2% target.

Change in risk balance — Committee judged that hiring slowdown now outweighs upside to inflation risk.

Heightened uncertainty – Persistent domestic and global uncertainties (financial‑market instability, global growth prospects) introduced the need for a more accommodative bias.

Dual‑mandate – The move is consistent with the Fed’s dual mandates of maximum employment and price stability, while remaining data-dependent in a gradual path to policy normalization.

 

Table: Key directives

Item	Directive
Target range	Maintain 4.00 % – 4.25 % via open‑market operations.
Repo	Minimum bid 4.25 %; aggregate limit $500 bn.
Reverse‑repo	Offering rate 4.00 %; per‑counterparty limit $160 bn/day.
Treasury roll‑over	Redeem coupon securities up to $5 bn/month cap; excess principal rolled over at auction.
Agency debt/MBS reinvestment	Reinvest excess principal (> $35 bn/month) into Treasury securities to match maturity profile.
Primary‑credit rate	Cut to 4.25 % (effective Sept 18).
Reserve‑balance rate	Cut to 4.15 % (effective Sept 18).

Source: FOMC Press Release

Voting Summary

• 11 members voted for the ¼‑point rate cut (voting for the action).
• 1 voted against (in favor of the larger ½‑point cut).

Figure: History of Fed Funds Target and Effective Rate

Source: FRED

Key Quotes From The Press Release

1. “Recent indicators suggest that growth of economic activity moderated in the first half of the year. Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.” – FOMC statement, Sep 17 2025.
2. “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen.” – FOMC statement, Sep 17 2025.
3. “In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4 to 4‑1/4 percent.” – FOMC statement, Sep 17 2025.