As August 2025 ends, U.S. markets are leaning heavily toward a Federal Reserve rate cut in September. Traders now see more than an 80% chance of a reduction, with expectations driven by softer job growth and inflation that is above target but not accelerating sharply.
Core Personal Consumption Expenditures (PCE), the Fed’s preferred inflation measure, rose 0.3% month over month and 2.9% year over year in July. Headline PCE increased 0.2% monthly and 2.6% annually. These figures suggest inflation is present but manageable, allowing the Fed room to adjust rates.
Fed Chair Jerome Powell’s dovish comments at the Jackson Hole symposium added to confidence. His reassurance that the Fed is prepared to act if conditions demand has helped fuel gains across stock markets through August, even as some late-month caution set in.
Market Confidence in September
Investor positioning reflects a strong belief that the September meeting will deliver at least a 25-basis-point rate cut. While some analysts remain skeptical, most traders are treating easing as the base case scenario.
Rate Cut Probabilities by Source
| Source | Probability of September Rate Cut |
|---|---|
| CME FedWatch Tool | Around 85%–87% |
| Investopedia (post-Powell speech) | Around 91.5% |
| Kiplinger (based on CPI data) | Around 90% |
| Morgan Stanley (more cautious view) | Around 50% |
These expectations are not unanimous. Major institutions like Morgan Stanley have urged caution, noting that parts of the economy are still showing resilience. However, the overall tone across markets remains one of anticipation.
How the Stock Market Reacted?
The possibility of rate cuts has supported equity gains across the board. Investors have viewed monetary easing as a tailwind for stocks, especially in sectors that benefit from lower borrowing costs.
- The equal-weight S&P 500 gained 2.7% in August, its longest four-month winning streak since 2021.
- The main S&P 500 index rose 1.9% during the same period.
- Smaller companies also performed strongly, with the Russell 2000 index climbing more than the large-cap averages.
Despite this positive trend, markets finished the last week of August with a slight pullback. The Dow dropped by 0.3%, while the S&P 500 and Nasdaq each slipped 0.1%. Seasonal caution ahead of September, which is historically a weak month for stocks, played a role in this late decline.
Inflation Trends Supporting the Case
The inflation backdrop has been crucial to forming expectations. The PCE and CPI reports for July provided important signals for policymakers and investors.
July 2025 Inflation Snapshot
| Indicator | Monthly Change | Yearly Change |
|---|---|---|
| Core PCE | +0.3% | 2.9% |
| Headline PCE | +0.2% | 2.6% |
| Headline CPI | +0.2% | 2.7% |
| Core CPI | +0.3% | 3.1% |
These readings remain above the Fed’s official 2% target but have not spiked to levels that would justify keeping interest rates at restrictive highs for much longer. For this reason, traders see enough space for the Fed to move toward easing.
Labor Market as the Deciding Factor
Employment trends have become another key reason behind rising expectations of a cut. Job growth has slowed significantly, and unemployment is beginning to climb. Average job gains between May and July were about 35,000 per month, which is the lowest level since the pandemic. Forecasts for August suggest around 75,000 new jobs, with unemployment expected to rise to 4.3%, the highest in nearly four years.
If these trends continue, the Fed may view a cut as necessary to support hiring and prevent a deeper slowdown in the labor market. Revised job numbers due in September may further highlight that past employment strength was weaker than first reported.
The Fed’s Own Messaging
Fed officials have been careful in their comments, but Powell’s Jackson Hole speech stood out for its dovish tilt. He emphasized the risk of weaker employment and signaled that inflation pressures from tariffs or other temporary factors might not last. Other officials, such as Christopher Waller, have shown openness to September easing and further cuts later in the year.
At the same time, no senior Fed voice has directly guaranteed that cuts are coming. The tone remains cautious, highlighting the Fed’s desire to keep flexibility until the next set of data, particularly the August jobs report, is released.
Currency and Commodity Movements
Financial markets outside equities have also reacted to the growing expectations. The U.S. dollar has weakened notably, as rate cuts generally reduce currency strength. This has been visible in its decline against the euro and yen toward the end of August.
Gold prices, on the other hand, have strengthened. Investors often move into gold when they expect lower interest rates, as the opportunity cost of holding the metal declines. A softer dollar has also supported this trend, adding to gold’s appeal.
Risks in the Background
While the market view is largely positive on rate cuts, some risks remain. Political interference, such as attempts to remove Fed officials, has raised concerns about the central bank’s independence. Though investors have not yet reacted sharply to these developments, they could introduce uncertainty in the months ahead.
Another risk lies in upcoming data releases. A surprisingly strong jobs report or hotter-than-expected inflation number could reduce the odds of a September cut. Conversely, weaker data would cement expectations of easing.
Short-Term Outlook
Markets are prepared for the September 16–17 Federal Reserve meeting to deliver a rate cut. If the Fed does cut by 25 basis points, it will be seen as the beginning of a shift toward supporting growth after a long period of holding rates high. The strength of future job reports, inflation numbers, and global developments will shape how far and how fast this shift goes.
For now, traders and investors remain positioned for a more supportive interest rate environment by the end of the year, though surprises cannot be ruled out.
FAQs
1. What is the probability of a Fed rate cut in September 2025?
The probability stands at around 85% to 90%, according to most market tools.
2. Why are markets expecting a cut even though inflation is still above target?
Inflation has moderated and is no longer rising quickly, giving the Fed space to focus more on slowing job growth and higher unemployment.
3. How has the stock market responded to these expectations?
Stock indexes have risen strongly in August, with the S&P 500 and smaller company stocks gaining on optimism about lower borrowing costs.
4. Could the Fed still decide not to cut rates?
Yes. A strong August jobs report or a sudden increase in inflation could push the Fed to hold rates steady.
5. What impact would a September rate cut have on ordinary people?
A cut would likely make borrowing cheaper for households and businesses, potentially lowering loan and mortgage costs, while also influencing currency and commodity markets.