US Fed meeting: Even though the market appears to have fully priced in a 25-basis-point rate cut, the outcome of the US Federal Open Market Committee’s (FOMC) September meeting remains a key event for global markets. Investors are eager to see how the Fed assesses the evolving mix of a cooling job market and sticky inflation.
The recent macroeconomic prints in the US have raised concerns that the world’s largest economy is heading for a phase of slowdown. The jobs market is losing steam, while inflation remains well above the Fed’s 2 per cent target.
Data showed that the US unemployment rate jumped to 4.3 per cent in August, up from 4.2 per cent in July. US job growth was at 22,000 in August, sharply dropping from 79,000 in July 2025. The US economy created 9,11,000 fewer jobs in the 12 months through March than previously estimated.
The US Consumer Price Index (CPI) increased by 2.9 per cent in August, a 0.2 per cent increase from July, when it rose 2.7 per cent. It was the highest jump in inflation this year after January.
Will the US economy face stagflationary pressures?
Investors fear that the US economy could face stagflationary pressures — a situation of weak economic growth combined with persistent inflation — if not in 2025, then perhaps in 2026, largely due to President Donald Trump’s aggressive tariff policies and stricter immigration rules.
However, experts believe the possibility of a stagflationary situation is feeble, and even if the US economy encounters such a situation, it won’t last long.
“The US economy has proved to be far more resilient than one could have expected. However, because of tariffs and other factors, there can be a recession in the US, perhaps in 2026. However, high inflation and negative growth generally don’t coincide for too long until it’s a supply-side issue. So, the possibility of stagflation is extremely rare, and it won’t last for long enough,” said Sujan Hajra, Executive Director, Chief Economist, Anand Rathi Group.
“While we definitely see that 2025 and 2026 will be challenging for the US, we do not see a deep recession or stagflation,” Hajra said.
Arindam Mandal, Head of Global Equities at Marcellus Investment Managers, also believes that the US economy will see a slowdown rather than a stagflation.
“Probably the bigger issue ahead is likely finding workers, not finding jobs. With immigration constrained, firms are likely to struggle with labour supply, even if demand remains. But supportive monetary policy, positive real wage growth, and high productivity give some cushion. They make it more likely that the US will see a slowing rather than a sharp pullback,” said Mandal.
“It doesn’t look like a collapse, but yes, more friction is likely. The combination of job growth softening, inflation still sticky in certain areas, and labour supply constraints means that some sectors will feel pressure,” said Mandal.
Mandal underscored that since productivity is improving, unit labour costs aren’t exploding, and real wages are growing, there is room for policy support to do its work without sending the economy into a hard contraction.
Mandal said the risk of pain is real but more moderate than some of the more pessimistic forecasts imply.
Will the US Fed go for a 50 bps cut?
Most experts believe the US Fed will trim rates by 25 bps. However, rates may come down cumulatively by 50-75 bps by the end of the year.
“A 25 bps cut will happen because of the softening US jobs market and Trump’s pressure. The Fed may cumulatively cut rates by 50-75 bps by December this year,” said G. Chokkalingam, founder and head of research at Equinomics Research Private Limited.
Some experts believe there could be three Fed rate cuts in 2025, followed by another two cuts in 2026.
Economists at ICICI Bank expect the Fed Funds rate to be cut by 25bps from 4.25%-4.50% to 4.00%-4.25% in September. They expect a split vote with at least two, if not three, members expected to vote for a 50bps cut.
“We expect the FOMC to cut rates by 25bps over September, October and December policy meetings respectively. Cumulatively, the FOMC could cut rates by 75bps over 2025. A further 50bps cut in 2026 is expected to unfold, although focus on central bank independence will likely increase in that period,” said ICICI Bank.
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