Fed Kicks Off the Cutting Cycle: First Take on the 25 bps September Move

The Fed’s First Cut: What September’s 25 bps Move Really Means

On September 17, 2025, the Federal Reserve delivered what had been signaled for months: a 25-basis-point cut in its benchmark interest rate. While expected, the decision carries outsized weight because it marks the first move of a new easing cycle. For investors, that moment often sets the tone for asset performance for months or even years.

The question now is whether this cut signals a preventive “soft landing” adjustment or the start of a more aggressive path responding to deeper economic weakness.

US President Donald Trump and Chair of the Federal Reserve Jerome Powell

1. Why This Cut Matters

The Fed’s action came against a backdrop of:

• Cooling labor markets: job creation has slowed notably since the spring, and wage growth is easing.

• Moderating inflation: goods inflation has softened, while services inflation remains sticky but off its highs.

• Fragile growth: leading indicators point to weaker housing activity and slower consumer spending.

  
  

Chair Jerome Powell emphasized in his press conference that while risks justify easing, there was no consensus for a larger 50 bps move. The Fed is cautious, seeking to balance downside risks with credibility around inflation control.

In essence, the Fed is opening the door to more cuts, but wants flexibility, not commitment.

2. Lessons From History

The first cut in a Fed cycle rarely happens in isolation. Looking back, each episode offers a guidepost:

• Mid-1990s: the Fed eased slightly after its inflation fight, engineering a rare “soft landing.” Markets rallied, the dollar was stable, and gold lagged.

• 2001–2003: aggressive cuts followed the dot-com bust. Equities struggled despite easier policy.

• 2008: cuts proved insufficient against the financial crisis. Treasuries rallied hard, equities collapsed, and gold became a safe haven.

• 2019: “insurance cuts” aimed to extend the cycle ended up being a prelude to the Covid shock.

  
  

Against this backdrop, today’s easing looks most similar to the 1990s, a preventive move rather than a firefighting exercise. But history warns: markets often struggle to distinguish between soft landings and recessions until much later.

3. Market Reaction: A Classic First-Cut Playbook… With a Twist

Markets responded decisively after the September move.

• Yield curve: The long end steepened as 10s and 30s sold off modestly, while 2-year yields fell sharply. This is textbook for a soft-landing scenario.

• Front-end Treasuries: The drop in short-dated yields was unusually aggressive. Historically, in soft landings, they remain stickier. Unless a recession emerges, the scope for further declines seems limited.

• Equities: The S&P 500 and Nasdaq extended gains, reflecting optimism around cheaper financing conditions and relief that the Fed isn’t behind the curve. Financials, housing, and tech led the rally.

• Gold: The yellow metal surged, in line with past easing cycles. But the scale of the move looks outsized compared to the 1990s soft landing, hinting at deeper unease about fiscal sustainability and global reserve diversification.

• Dollar: The greenback weakened. That’s unusual, historically, early Fed cuts often boost the dollar on safe-haven demand. This time, markets seem increasingly cautious about the U.S. currency’s reserve dominance.

  
  

4. The Paradox of the Dollar and Gold

Two standout moves deserve more attention:

• Gold’s rally reflects both traditional safe-haven demand and a broader trend: central banks reducing dollar exposure and increasing bullion reserves. With U.S. deficits widening and political risks mounting, investors appear to see gold as more than just an inflation hedge.

• Dollar weakness runs counter to past easing cycles. Instead of strengthening, the DXY slid. This suggests markets believe the Fed will lean dovish for longer and that U.S. assets may underperform global peers if growth slows further.

  
  

Taken together, the moves in gold and the dollar suggest rising skepticism about U.S. fiscal credibility and reserve-currency stability.

5. The Dot Plot Drama

The Fed’s infamous “dot plot” also arrived with this decision. Here’s the takeaway:

• 2025 dots imply another one to two cuts this year, in line with market pricing.

• 2026–2027 dots cluster around 3.375%–3.125%, suggesting a lower-rate environment ahead.

• Yet markets price something even more aggressive: nearly 150 bps of cuts by end-2026.

  
  

That leaves the Fed in a tricky position. It’s hard to out-dove market expectations when traders already assume so much easing. Unless the Fed signals cuts without downgrading growth forecasts, it will be difficult to deliver a true dovish surprise.

Complicating matters, potential turnover at the FOMC, including Trump-era reshuffles, means the dots may not reflect the actual decision-makers in a year’s time. Investors are right to take the longer-term projections with a grain of salt.

6. A Global Easing Cycle

The Fed isn’t alone:

• Bank of Canada: Already further along, having cut to 2.5%, with more expected.

• Europe: Fiscal tensions (notably in France) are widening spreads, while the ECB hesitates on cuts given persistent core inflation.

• Emerging markets: Most EM currencies have rallied strongly this year on the back of Fed expectations. But not all, the Turkish lira, Argentine peso, and Russian ruble remain idiosyncratic laggards.

  
  

Global coordination isn’t official, but the pattern is clear: major central banks are shifting from tightening to easing, albeit at different speeds.

7. Risks and Opportunities

Markets love clarity, but the road ahead remains clouded.

• Risk 1: False soft landing. If growth weakens more than expected, today’s “insurance cut” could quickly morph into an aggressive cutting cycle. That would challenge risk assets, especially equities.

• Risk 2: Inflation flare-up. If services inflation rebounds or oil shocks persist, the Fed may find itself cutting while inflation rises — a credibility trap.

• Risk 3: Fiscal overhang. U.S. deficits and Treasury issuance needs could weigh on the long end, even in an easing environment.

  
  

On the flip side:

Opportunities:

• Duration trades: long Treasuries remain attractive if the slowdown deepens.

• Gold and precious metals: already outperforming, with structural tailwinds.

• Quality equities: companies with strong balance sheets and pricing power should continue to benefit from lower rates.

  
  

8. Conclusion: Turning Point or Red Flag?

The September 17th cut marks a clear turning point in U.S. monetary policy. For now, the narrative is soft landing: the Fed is trimming rates just enough to cushion the economy without fueling inflation. Markets, from equities to gold, are cheering the shift.

Yet beneath the surface, cracks are visible. The unusual combination of a weaker dollar, outsized gold gains, and aggressive front-end rallies suggests investors are hedging more than just growth risks. They’re questioning fiscal sustainability, dollar dominance, and the Fed’s ability to manage this cycle smoothly.

History shows that the first cut often feels like good news. But whether September 2025 becomes remembered as the start of a soft landing or the warning shot of something worse, will depend on the data in the months ahead.

One thing is certain: the easing cycle has begun, and the world’s most important central bank has shifted into a new gear. Markets will be watching every tick, dot, and Powell phrase from here.