Fed cuts rates for the first time since December

After nine months of holding rates steady, the Federal Open Market Committee (FOMC) decided on Sept. 17 to lower the Federal Funds rate by 0.25%, as they strive to balance supporting the cooling job market with keeping inflation under control.

Meanwhile, both sides of the Federal Reserve mandate—achieving full employment, on one hand, and keeping inflation close to 2%, on the other—remain off target, said Brian Henderson, BOK Financial® chief investment officer.

"Though it's not at recessionary levels, the job market is showing signs of deteriorating," he said. "Job growth has slowed down to a trickle and the unemployment rate is starting to move up. Once unemployment starts to rise, it has had a tendency to gather a lot of momentum and can feed on itself, so it then often rises even further."

He and other experts emphasize that the most recent unemployment rate—4.3%, as of August—is still relatively low from a historical standpoint. However, that figure probably would be higher if it weren’t for the aging U.S. demographic y tighter immigration policies, both of which are reducing the number of working-age people in the country.

When the economy, including the job market, is weakening, central banks such as the Fed often lower interest rates to try to stimulate economic growth—but that also increases the risk of rising inflation, putting central banks in a conundrum when both a slowing economy and high inflation are factors.

Job market in worse shape than previously thought
Although the U.S. job market already had been showing signs of cooling, up until recently inflation seemed to be the bigger concern for the Fed. Not only was inflation over the Fed’s 2% target, which it still is, federal policies on aranceles y immigration further exacerbate the risk of prices rising, Henderson said.

However, when the July jobs report was released, it revealed that the labor market was actually worse off than many thought. "Not only was July job growth weak, but the previous couple of months of job gains were also revised lower-and then that same thing happened again in the August report,” Henderson explained.

Altogether, this and other data indicating a weakening mercado laboral pushed the chances of a Fed rate cut this month to 100%. And so, going into the recent FOMC meeting, the question was not "will they cut rates" but rather "by how much will they cut." With this in mind, Henderson believes that the FOMC will cut rates by 0.25% again at both their October and December meetings, with one more cut likely in early 2026, for a total of a 1% drop needed to get down to a "neutral" Federal Funds rate that is neither restrictive nor stimulative to economic growth.

Changes in U.S. non-farm job numbers

Inflation still a risk—but a minor one
Meanwhile, the more the Fed lowers rates, the more rising inflation is a risk. However, based on current data, it seems to be a low one compared to the risk of a slowing economy and, with it, a further-weakening job market, Henderson noted.

Additionally, tariffs may raise prices somewhat, although they’re likely to be only one-time price increases, he said, and some of the effects of tariffs may not be passed down to consumers at all.

"Once the tariffs are in place, businesses that import goods from countries that are impacted by tariffs have choices. They can absorb some of the increased price or they can try to pass only some of the increased cost to consumers. Companies that are exporting goods to the U.S. can also absorb some of the costs from tariffs. All three of those choices, which mitigate the impact of tariffs on U.S. consumers, are already happening," he explained.

Economy may continue to slow
The Fed's decision to cut rates will help some areas of the economy and markets such as financial stocks, short-term bonds and the stocks of smaller and middle-sized companies that have higher amounts of debt, as long as the U.S. doesn't go into a recession, Henderson said. If mortgage rates fall, which is not a certainty, that could help the housing market, as well as industries that coincide with it.

Furthermore, if the Fed cuts rates and other central banks continue to hold theirs steady, the U.S. dollar would likely fall against the currencies of those countries. If that happens, it would boost U.S. exports and, with them, growth in gross domestic product (GDP) but it would make the prices of goods imported into the U.S. higher, Henderson notes.

Even with the Fed cutting rates, economic growth is likely to stay weak for now, but Henderson doesn't think the U.S. is headed for a recession at this point. Instead, economic growth-and, with it, an improvement in new job growth-may be on the horizon for 2026.