By Antonio Di Giacomo, Financial Markets Analyst for LATAM at XS.com
September 18, 2025 –
“The Federal Reserve decided to lower interest rates by 0.25 percentage points, bringing them to a range of 4.00% to 4.25%. This move marks the first cut in nine months and reflects growing concern about a slowdown in the labor market, which is showing weaker job creation and a rising unemployment rate. The measure also seeks to balance the risks of still-high inflation with the need to sustain economic growth.
Chair Jerome Powell emphasized that the time has come to adjust monetary policy and signaled that at least two additional cuts are expected over the remainder of the year. The appointment of Stephen Miran to the Board of Governors has strengthened the push for deeper reductions. However, his dissenting vote at this meeting revealed internal differences over the pace of monetary easing.
The Fed’s updated projections place the benchmark rate around 3.6% by the end of 2025 and 3.1% by 2027. Although the adjustment path will be gradual, the goal remains to bring inflation down to 2% within that horizon. The institution highlights that, despite the slowdown in job creation, the labor market continues to show resilience, though with a trend toward moderation.
Unemployment is expected to hover around 4.5% this year, with slight improvements toward 2027. This suggests that the Fed anticipates an orderly cooling of the labor market without massive job losses. Nevertheless, the rate-cutting policy is being applied cautiously to avoid an excessive loosening that could spark an inflationary rebound.
At the same time, economic growth was revised upward. GDP is projected to expand 1.6% in 2025, 1.8% in 2026, and 1.9% in 2027, reflecting a scenario of moderate slowdown but without an immediate risk of recession. This improvement is partly due to stronger consumption and investment, supported by easing financing costs.
The inflation backdrop still poses challenges, as core prices, particularly in services, remain above desired levels. The Fed has made it clear that it will continue to monitor price developments closely and, if necessary, could adjust the size and pace of cuts to avoid imbalances.
The decision also carries international implications. A weaker dollar following the cuts could benefit emerging economies by easing external financing pressures and improving risk appetite. However, global markets will remain watchful of the Fed’s ability to balance its strategy without losing credibility in the face of inflationary challenges.
In conclusion, the start of the Federal Reserve’s rate-cutting cycle represents a significant shift in its monetary strategy. While it aims to support the economy amid labor market cooling, the central bank maintains a cautious stance, aware that inflation remains above target. The challenge will be to sustain growth without jeopardizing price stability, in a scenario where market expectations and institutional credibility play a decisive role.