Data Dependence: The Federal Reserve has always emphasized that 'data determines policy.' Powell has repeatedly stated that monetary policy 'does not preset a path,' but rather assesses the situation based on the latest data and adjusts accordingly. This means that in the absence of sufficient economic changes, the Fed tends to maintain the current interest rate level.
Forward Guidance: The Fed is adept at conveying future intentions to the market through statements and speeches. After the 2008 financial crisis, the Federal Reserve pointed out in its statements that economic weakness 'may require keeping interest rates low for a period of time.' This prior signal allowed the market to adjust expectations in advance. In recent years, the FOMC meeting statements have consistently emphasized 'closely monitoring economic prospects and risks,' allowing room for future policy adjustments.
Prudent and Gradual: In uncertain times, the Federal Reserve tends to adopt a gradual approach to rate hikes/cuts. Powell explained at the 2018 Jackson Hole meeting that if the economy and employment remain strong, 'further gradual rate hikes remain an appropriate choice.' Currently, as inflation has significantly receded, the Fed may also adopt a similar approach when deciding to cut rates, that is, to cut rates slightly each time and implement it in multiple steps to observe the economic response.
Chairman Powell's Personality and Policy Preferences
Powell emphasizes the balance of dual objectives and policy independence. He has repeatedly stressed in public speeches that monetary policy must 'balance' the need to curb inflation and support employment. Regarding the current risks of conflict between inflation and employment, Powell pointed out that the risks of inflation rising are greater than the risks of the labor market declining, so he will proceed with 'caution' when considering interest rate adjustments. He also emphasized that 'one-time price increases must not be allowed to evolve into sustained inflation', indicating a determination to curb inflation. However, he also acknowledges that if the economy weakens significantly, he will take swift action to prevent excessive deterioration in the labor market. Overall, Powell's character is calm and pragmatic, tending to make decisions based on the latest economic data rather than a fixed timetable.
Key Economic Data
Inflation (CPI and Core PCE): As of mid-2025, the U.S. inflation rate is close to the policy target. In August 2025, the year-on-year CPI was approximately +2.9%, core CPI (excluding food and energy) was +3.1%; the Personal Consumption Expenditures (PCE) price index in July was approximately +2.6% year-on-year, and the core PCE was around 2.9%. Recent rises in housing, services, and energy prices have driven a slight rebound in inflation, but overall it has significantly receded. Federal Reserve officials continue to pay attention to the trend of inflation 'hovering around 2%'; as Powell stated, he will not allow one-time price shocks to evolve into sustained inflation.
Labor Market: The labor market remains relatively tight. In June 2025, the U.S. unemployment rate remained around 4.2%, close to full employment levels. Recently, the growth rate of new non-farm jobs has significantly slowed, with only +73,000 in July; although employment has slowed, overall employment remains stable. The Fed has noted that employment data has shown signs of slowing, but as long as the unemployment rate remains low and wage growth is moderate, decision-makers have space to wait and not cut rates immediately.
GDP and Consumption: The U.S. economy continues to grow moderately. In the first quarter of 2025, GDP grew approximately 2.5% year-on-year, mainly due to strong private consumption (PDFP). However, growth expectations for other quarters have been downgraded, with most forecasting the GDP growth rate for 2025 to be in the range of 1% to 2%. Consumer spending has performed reasonably well, with PDFP growth at 2.5% in the first quarter. Overall, consumption and investment continue to support economic operation, but the growth momentum has weakened compared to previous periods.
Market Liquidity and Credit: The banking system's overall liquidity is sufficient. The Fed maintains high interest rates on reserves (IOR) and standing repurchase agreements to ensure overall stability in the overnight funding landscape. In September 2025, the overnight repurchase rate (SOFR) briefly rose to 4.42%, slightly above the IOR of 4.40%, indicating a temporary rise in funding demand during the tax period, but the Fed's tools buffered the pressure. In terms of credit, the Fed's July bank credit survey showed that in the second quarter of 2025, corporate lending standards were generally tightening, with weakened loan demand; there are also signs of tightening in commercial real estate credit. For household loans, mortgage standards remain stable, but credit card and home equity loan standards have tightened. In summary, the overall credit environment in the banking sector is relatively tightening, which may further suppress investment and spending.
Market Expectation Indicators
CME FedWatch: Market expectations for rate cuts continue to rise. The FedWatch tool shows that as of the summer of 2025, the market's probability of a 25 basis point rate cut in September 2025 had reached as high as 85%. Research from Bank of America indicates that by the end of 2025, the market has priced in at least two rate cuts. The overall expectation is that cuts will begin in the second half of the year, with cumulative cuts of about 50 to 100 basis points before the end of the year.
U.S. Treasury Yield Curve: The yield curve has recently regained its positive slope. As of August 2025, the yield on the 10-year Treasury bond was about 0.53 percentage points higher than that of the 2-year bond, indicating that the market believes the long-term outlook is relatively optimistic. However, the steepness of this curve is lower than the historical average (~0.8%), as the curve had been inverted for a long time between 2022 and 2024. Overall, the current curve's mild steepness reflects the market's general expectation that the Federal Reserve will eventually cut rates, but with caution regarding future economic conditions.
U.S. Dollar Index (DXY): The U.S. dollar fell sharply in the first half of 2025. According to a report released by JPMorgan, the DXY index fell by approximately 10.7% in the first half of 2025 (the largest semi-annual decline in 50 years). Although the Federal Reserve still maintains high interest rates, concerns about the slowdown in U.S. economic growth, massive fiscal deficits, and policy uncertainties have suppressed the dollar. With the Federal Reserve's monetary policy shifting to a more moderate stance, the dollar is expected to remain under pressure in the short term. The weakening dollar has also enhanced the attractiveness of other currencies and safe-haven assets.
Gold and Cryptocurrency: Safe-haven and speculative assets are sensitive to changes in Federal Reserve policy. In mid-September 2025, the spot gold price broke through $3,700 per ounce, setting a new historical high. Analysts believe this is primarily driven by increased expectations of rate cuts, a weakening dollar, and heightened safe-haven demand for gold due to geopolitical risks. In contrast, cryptocurrencies like Bitcoin have recently shown relatively weak performance. As of March 2025, gold had increased by approximately 16% year-to-date, while Bitcoin had fallen by over 6%, reflecting that market risk aversion is more flowing toward traditional precious metals rather than cryptocurrencies.
Possibility, Timing, and Magnitude of Rate Cuts
It should be noted that the Federal Reserve has already begun a rate cut cycle starting at the end of 2024: in December 2024, the FOMC lowered the federal funds rate target range by 25 basis points to 4.25%–4.50%. Looking ahead, considering various factors, we judge that the likelihood of continuing to cut rates in the second half of 2025 is high:
Possibility: Powell and other Federal Reserve officials emphasized that interest rate cuts will strictly depend on data. Currently, inflation and employment are close to target levels, making the necessity for further rate cuts in the short term not high. However, market sentiment has clearly tilted towards rate cuts, and FedWatch and institutional forecasts show a significant increase in the probability of the Federal Reserve starting to cut rates in 2025. Overall, the likelihood of the first rate cut occurring in the second half of 2025 is significantly higher than in the first half.
Timing Expectations: Most market participants expect the first rate cut to possibly occur in the third quarter of 2025. The market currently views the September or November meetings of 2025 as potential timing. If inflation continues to gently decline and employment growth remains weak before then, the Federal Reserve is very likely to initiate rate cuts at the mid-term meeting. If economic conditions stabilize or improve slightly, rate cuts may be delayed until the end of 2025.
Magnitude Range: Based on the current target interest rate (4.25%–4.50%) and policy communication, it is generally expected that each rate cut will be 25 basis points, with a cumulative total of about 50–100 basis points (i.e., 2–4 rate cuts) over the year being a reasonable range. CME analysis indicates that the market implies a probability of over 50% for a cumulative three rate cuts (75 basis points) before the end of 2025, which is similar to other institutional expectations. If the mid-term economic slowdown is significant, cumulative rate cuts may be revised upwards; if inflation stubbornly rebounds or the economy remains strong, the pace of rate cuts may slow.
Risk Factors
Risk of Inflation Rising Again: If tariff policies push up import prices or fiscal stimulus amplifies demand, the inflation rate may rebound. Powell has warned multiple times that he will not allow a one-time price increase to evolve into sustained inflation. Once inflation returns to a high level, the Federal Reserve will be forced to delay rate cuts or even raise rates again.
Risk of Economic Hard Landing: Conversely, if the U.S. economy or the global economy unexpectedly slows sharply (such as a dramatic deterioration in employment, or a crisis in the bond market or banking sector leading to credit tightening), the Federal Reserve may need to cut rates more quickly and on a larger scale to stabilize the economy. The Federal Reserve will take a comprehensive view of labor market conditions; a rapid rise in unemployment will accelerate the decision to cut rates.
Financial Market Shock: Significant changes in market liquidity or credit environment will also affect decision-making. For example, if overnight interest rates fluctuate dramatically or interbank borrowing experiences a chain reaction, the Fed may adjust the use of policy tools to mitigate the shock, which will change the pace of rate cuts.
Political and External Uncertainty: The political situation in the U.S. (such as interference with the independence of the Federal Reserve) and global events (trade tensions, geopolitical conflicts, etc.) are all sources of uncertainty. Although the Fed emphasizes its independence, any significant policy changes (such as a major escalation in tariffs) could disrupt economic expectations and subsequently affect the path of rate cuts.
Conclusion
Based on the above analysis, the overall probability of the Federal Reserve cutting rates in the second half of 2025 is high. Currently, as inflation and employment approach target levels, the third quarter of 2025 is the most likely time for the first rate cut. The cumulative rate cut for the year is expected to be in the range of 50 to 100 basis points (2 to 4 cuts of 25 basis points). The Federal Reserve will continue to maintain a data-dependent, gradual, and prudent strategy, flexibly making decisions based on future inflation and employment data. If there are significant deviations in the economy or inflation, the path of rate cuts will also be adjusted accordingly. In this process, market sentiment, bond market trends, and the performance of safe-haven assets can provide clues about policy direction; investors and policymakers will closely monitor data updates and changes in risks to assess the best timing for the Federal Reserve's policy adjustments.
