Federal Reserve — FOMC Statement (USA, 2025)

FOMC Minutes of the Federal Open Market Committee September 16 17, 2025 F E D E R A L R E S E R V E S Y S T E M Minutes of the Federal Open Market Committee September 16--17, 2025 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, September 16, 2025, at 10:30 a.m. and continued on Wednesday, September 17, 2025, at 9:00 a.m.1 Developments in Financial Markets and Open Market Operations The deputy manager turned first to an overview of financial market developments during the intermeeting period. Markets appeared to interpret data releases and FOMC communications as indicating that the baseline outlook was little changed but that downside risks to the labor market had increased. Median modal expectations for personal consumption expenditures (PCE) inflation this year and next from the Open Market Desk s Survey of Market Expectations (Desk survey) increased only slightly, and expectations for the unemployment rate increased only marginally overall. However, after the weaker-than-expected July and August employment reports, investors  focus shifted to downside risks to the labor market. Near-term expectations for the policy rate had moved lower in response to weaker-than-expected employment data and the apparent rise in downside employment risks. Almost all respondents to the Desk survey expected a 25 basis point cut in the target range for the federal funds rate at this meeting, and around half expected an additional cut at the October meeting. The vast majority of survey respondents expected at least two 25 basis point cuts by year-end, with around half expecting three cuts over that time. Respondents  expectations for 2027 and beyond were unchanged, implying that revisions to respondents  near-term expectations reflected an anticipation of a faster return of the federal funds rate to its longer-run level than previously expected. Market-based measures of policy rate expectations were broadly consistent with responses to the Desk survey, reflecting about three 25 basis point cuts by the end of the year. The deputy manager then discussed developments in Treasury markets and market-based measures of inflation compensation. Nominal Treasury yields fell 20 to 40 basis points over the intermeeting 1 The Federal Open Market Committee is referenced as the  FOMC  and the  Committee  in these minutes; the Board of Governors of the Federal Reserve System is referenced as the  Board  in these minutes. 2 September 16-17, 2025 period, with the largest decline occurring at the short end of the yield curve; the curve therefore steepened. Staff models indicated that nearly all the decline in short-term rates was attributable to the shift down in policy rate expectations. Market-based measures of inflation compensation fell slightly over the intermeeting period. Equity prices continued to rise over the intermeeting period and stood very close to record highs despite the recent weaker-than-expected employment reports. The deputy manager noted this development was consistent with the benign baseline macroeconomic outlook incorporated in most private-sector forecasts and strong realized earnings in technology and other sectors. Corporate bond spreads were little changed over the intermeeting period and remained at tight levels, signaling that investors anticipated relatively moderate credit losses. Regarding foreign exchange developments, the deputy manager noted that the broad trade-weighted dollar index had generally stabilized and that the dollar returned to trading roughly in line with fundamental macroeconomic drivers over the intermeeting period. The available data continued to suggest foreign demand for U.S. assets remained resilient. The deputy manager turned next to money markets. The effective federal funds rate remained stable, and repurchase agreement (repo) rates moved higher over the intermeeting period. The increase in repo rates over the period was driven by the increase in net Treasury bill issuance amid the rebuilding of the Treasury General Account (TGA) following the debt ceiling resolution, continued large Treasury coupon issuance, and ongoing reductions in the Federal Reserve s balance sheet. Reserves fell sharply on September 15 in response to an increase in the TGA, driven by tax receipts and significant net issuance of Treasury coupon securities. Repo rates came under additional upward pressure that day, and take-up at the standing repo facility (SRF) reached $1.5 billion. There were some signs of slight upward pressure on rates in the federal funds market but not enough to move the effective federal funds rate. While key indicators remained consistent with abundant reserves, money market rates were expected to continue to increase over time relative to administered rates and to eventually pull the effective federal funds rate higher. The deputy manager concluded by discussing the trajectory of the balance sheet. If balance sheet runoff were to continue at the current pace, the System Open Market Account (SOMA) portfolio was expected to decline to just over $6 trillion by the end of March, with Federal Reserve notes growing at a gradual pace, the TGA fluctuating around current levels, and usage of the overnight reverse repurchase agreement (ON RRP) facility remaining very low except on quarter-end dates. As a result, the deputy manager expected reserves to be close to the $2.8 trillion range by the end of the first quarter of next year if runoff were to continue at the current pace. Minutes of the Federal Open Market Committee 3 All but one member of the Committee voted to ratify the Desk s domestic transactions over the intermeeting period. Governor Stephen Miran, who had been sworn in as a member of the Board that morning, abstained from voting. There were no intervention operations in foreign currencies for the System s account during the intermeeting period. Staff Review of the Economic Situation The information available at the time of the meeting indicated that real gross domestic product (GDP) growth had moderated in the first half of the year. Although the unemployment rate continued to be low, the pace of employment increases had slowed, and labor market conditions had softened. Consumer price inflation remained somewhat elevated. Total consumer price inflation as measured by the 12-month change in the PCE price index was estimated to have been 2.7 percent in August, based on the data from the consumer and producer price indexes. Core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was estimated to have been 2.9 percent in August. Both inflation rates were at the upper end of their ranges since the beginning of the year. Recent data indicated that labor market conditions had softened. The unemployment rate edged up to 4.3 percent in August, a little higher than it had been at the beginning of the year. The participation rate was somewhat lower in August than it was at the beginning of the year. Average monthly increases in total nonfarm payrolls over July and August were weak, and job gains were revised down notably in May and June. The Bureau of Labor Statistics  (BLS) preliminary estimate of the benchmark revision for April 2024 through March 2025 indicated that the level of payrolls for March was more than 900,000 lower than had been reported. The ratio of job vacancies to unemployed workers was 1.0 in August and remained within the narrow range seen over the past year. The employment cost index of hourly compensation for private-sector workers increased 3.5 percent over the 12 months ending in June, and average hourly earnings for all employees rose 3.7 percent over the 12 months ending in August. Both wage growth measures were lower than their year-earlier levels. Real GDP rose in the second quarter after declining in the first quarter, but GDP growth over the first half as a whole was slower than last year. Growth of real private domestic final purchases (PDFP)  which comprises PCE and private fixed investment and which often provides a better signal than GDP of underlying economic momentum had also moderated in the first half relative to last year. Recent indicators for consumer spending and business investment spending particularly for high-tech equipment and software pointed to further moderate gains in PDFP in the third quarter, but housing- sector activity remained weak. After falling sharply in the second quarter, real imports of goods increased in July, particularly for capital goods. By contrast, exports edged down in July, following modest increases over the first half of the year. 4 September 16-17, 2025 Foreign GDP growth slowed markedly in the second quarter, as the transitory boost due to the front- loading of U.S. imports earlier in the year faded. Canadian economic activity contracted significantly, as exports of price-sensitive industrial supplies fell sharply in the face of higher U.S. tariffs. Economic growth in Mexico and parts of Asia was supported by strong demand for high-tech products. Headline inflation was near central banks  targets in most foreign economies, aided by past declines in energy prices. However, core inflation remained persistently elevated in some economies, such as Brazil, Mexico, and the U.K. By contrast, inflation in China continued to be subdued. Several foreign central banks including the European Central Bank held their policy rates steady, while others such as the Reserve Bank of New Zealand and the Reserve Bank of Australia resumed reducing their policy rates, as disinflatio