Powell Delivers 25 bps Rate Cut, Paves Way for Gradual Policy Easing

September 18, 2025: A moment that the US market had been anticipating since the start of the year has finally arrived, and it has raised hopes among the masses. Mike Powell, the chair of the U.S. Federal Reserve, has announced its first interest rate cut of the year.

The benchmark rate has now been slashed by 25 basis points to a range of 4.00%-4.25%. A welcome move for the struggling American economy. There’s also an indication of two more quarter-point cuts most likely before the end of the year. This would mark a shift toward easing after a period of holding steady.

Drivers Behind the Move

A lot of factors led to this crucial decision of an interest rate cut. Firstly, there is the declining job market. As per the latest data report, unemployment is at its highest since the COVID era, and job gains have also slowed down. Secondly, inflation has stayed above the Fed’s 2% target, with projected year-end inflation at around 3%. The policymakers hinted that such a downside risk to employment is a good enough reason to take stringent action in the policies.

Projections & Member Views

Alongside the rate cut, the Fed released updated economic projections. Growth for 2025 is now expected at 1.6%, up from 1.4% in earlier forecasts. Meanwhile, unemployment is forecast to remain roughly at 4.5%, showing a moderate increase from recent levels. Some members voiced support for a more aggressive cut of 50 basis points, but the majority favoured the quarter-point move with two additional cuts planned for upcoming meetings. Only one dissenting vote was cast.

Implications for Inflation and Trade Policy

Inflation pressures linked to tariffs are viewed as likely temporary. At the same time, the Fed emphasised monitoring employment risks, seeing lagging job growth and rising unemployment as more immediate threats to economic health.

What It Means for India

The policy shift in the U.S. could influence global capital flows, exchange rates, and interest costs, all of which often affect emerging markets like India. Indian markets may respond to softer U.S. rates with improved investor sentiment and potentially greater inflows from foreign portfolio investors. Trade-weighted currencies and import/export dynamics may also adjust in response to the global interest rate environment.

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