Fixed income markets are confident that the Federal Open Market Committee cuts interest rates at the conclusion of their next scheduled meeting on September 17. Current expectations are for a 9 in 10 chance of a cut in the Federal Funds rate from 4.25% to 4.5% down to 4% to 4.25%. Expectations for an interest rate cut have risen after recent soft jobs data released on August 1.
Inflation has also generally moderated overall in 2025 despite some acceleration early in the year. This is important, because the main reason that interest rates are currently at a relatively restrictive level is to help bring inflation down to the FOMC’s 2% annual goal. Consumer Price Index inflation is currently at 2.7% headline and 2.9% excluding food and energy for the 12 months to June 2025. The most recent CPI reading showed some moderate signs of tariff-related inflation in goods prices. However, various FOMC policymakers have signaled some willingness to look through what may be one-off tariff price increases in setting monetary policy.
There are still several weeks before the FOMC next meets, during that time there will be more data on the economy. Should jobs creation rebound from its early summer slump or inflation heat up, then a cut might become less probable. However, it would be unusual for such high expectations for an interest rate cut to reverse. The key reports before the FOMC next meets will be CPI releases on August 12 and September 11 and the jobs report on September 5.