Why Markets Are Banking on a Fed 25-Point Rate Cut in September

Investors are increasingly confident that the Federal Reserve will reduce interest rates by 25 basis points at its upcoming policy meeting in September. A wave of soft labor statistics—including notably weaker job growth and a rise in unemployment to approximately 4.3%—has bolstered the case for easing. Meanwhile, inflation pressures have shown signs of cooling, which many believe gives the Fed leeway to shift policy toward a more neutral footing.

Market pricing reflects these expectations: there is now close to a 94% probability of a 25-basis-point cut at the Fed’s meeting, with only a slim chance of a more aggressive 50-point cut. Major financial institutions are aligning with this outlook. Some forecasters, including leading brokerages, are also projecting that cumulative rate cuts could reach 75 basis points by the end of the year if conditions worsen.

While the Fed faces the classic dilemma of supporting a cooling labor market without jeopardizing gains in inflation control, current economic signals suggest the risks lean toward acting sooner rather than waiting. Labor market deceleration, moderating inflation, and growing investor anticipation all point toward a policy shift. Still, much will depend on how the Fed frames its narrative in its upcoming statement—investors will be watching how strongly officials emphasize inflation risks versus backing growth.

In short, the case for a September rate cut has solidified: indicators are weakening, inflation is easing, and markets are already preparing for lower rates. Whether this marks just the start of easing or a more prolonged cycle will depend on upcoming data and the Fed’s communication strategy.