After months of unrelenting inflation pressure, the U.S. Federal Reserve (Fed) finally caught a breather in September 2025, as its preferred inflation gauge showed tentative signs of cooling. According to Bloomberg, the personal consumption expenditures (PCE) index, excluding food and energy, was forecast to have risen just 0.2% in August—down from 0.3% in July. Yet, on an annual basis, the measure held steady at 2.9%, stubbornly above the Fed’s 2% target. This subtle shift gave central bankers a sliver of space to address a labor market that’s beginning to show cracks, but inflation remains a persistent worry.
Fed Chair Jerome Powell justified the first rate cut of 2025, implemented on Wednesday, September 17. He pointed to a slowdown in jobs as a key factor behind the move, remarking, “It’s challenging to know what to do. There are no risk-free paths now.” Despite the cut, Powell and his colleagues made it clear that they were not declaring victory over inflation. The shadow of President Donald Trump’s tariffs continues to loom large, with their effects still working through the economy years after their introduction, keeping costs elevated for both producers and consumers.
The Fed’s decision to cut rates by 0.25%, bringing the Fed Funds rate down to a range of 4-4.25%, was widely anticipated. What caught the market’s attention was the Fed’s signal of further cuts ahead, as reflected in the so-called “dot plot” of officials’ interest rate expectations. It indicated another two rate cuts in 2025 and a further reduction in 2026. While the Fed did revise its growth and inflation forecasts slightly upward for next year, it cited a notable shift in risks toward higher unemployment, with job gains slowing and unemployment inching up. Powell explained that labor demand had “slowed sharply and by more than labor supply.”
Stephen Miran, a Trump appointee who recently joined the Fed as governor, voted for a deeper 0.5% cut. However, the Fed’s dovish tilt rendered his preference largely academic. Miran, along with other Fed officials—Michelle Bowman, Mary Daly, and Alberto Musalem—were scheduled to speak publicly during the week of September 22, offering their perspectives on the economic outlook. Powell himself was set to deliver remarks in Rhode Island on Tuesday, September 23, seeking to guide expectations without making firm promises.
This dovish turn from the Fed reverberated through global markets. Over the week ending September 19, U.S., European, and Japanese shares all rose, buoyed by the prospect of easier monetary policy. However, Chinese shares bucked the trend, slipping slightly as economic data from Beijing continued to disappoint. In Australia, the share market fell for a third consecutive week, dropping around 0.7% as energy, consumer staples, health, and telecommunications stocks led the decline. The Australian dollar dipped but held above US$0.66, while 10-year bond yields edged higher. Gold prices reached another record high, though the gain was modest as the Fed’s move had been widely anticipated. Metal prices fell, but oil and iron ore prices climbed.
Friday’s U.S. economic report was expected to show that inflation-adjusted consumer spending slowed in August, and economists were closely watching personal income data to gauge whether Americans can sustain their spending. With consumption comprising the bulk of U.S. economic activity, any stall here could threaten broader growth. Despite solid retail sales for a third straight month—possibly boosted by higher goods prices and the early Labor Day holiday—industrial production has been trending flat to down. Regional manufacturing surveys painted a mixed picture, with sharp divergences between the New York and Philadelphia regions. Meanwhile, jobless claims fell back after a spike in Texas, but continuing claims have been trending up. U.S. housing remained weak, with starts and building permits down in August, though mortgage applications have started to rise as rates fall.
Internationally, the economic calendar was packed. In Canada, the economy contracted by 1.6% from April to June as the U.S. trade war battered exports. The Bank of Canada responded by cutting its policy rate by 0.25% to 2.5%, with Governor Tiff Macklem signaling a cautious approach amid stable inflation around 3%. Canadian money markets are now pricing in further cuts to 2.25% by early next year. Statistics Canada was also set to release second-quarter population data, as Prime Minister Mark Carney’s administration works to manage the housing crunch following an immigration surge.
Across the Atlantic, the Bank of England kept rates on hold, citing persistent inflation—August CPI inflation remained at 3.8% year-on-year, though core inflation eased to 3.6%. Guidance from the BoE remained for a “gradual and cautious approach” to future cuts. In Japan, the central bank left rates unchanged at 0.5% but signaled a bias toward further hikes, with two board members voting for an increase. Japanese inflation fell back to 2.7% year-on-year in August, with core inflation flat at 1.6%. The Bank of Japan also announced plans to begin selling ETFs, moving toward quantitative tightening.
Asia was abuzz with data releases. South Korea’s 20-day trade statistics kicked off the week, offering an early look at chip exports and global demand. China was set to announce its loan prime rates, with markets expecting no change. Purchasing manager indexes from Australia and India, as well as inflation figures from Singapore and Malaysia, were slated for Tuesday. Australia’s partial price report on Wednesday would help shape Reserve Bank policy, while midweek also saw Japan’s PMI numbers, retail sales, and Tokyo inflation data. By week’s end, Singapore was to publish industrial production data, South Korea would report on business and consumer sentiment, and New Zealand would release consumer confidence figures. On Saturday, China was to share August industrial profit data, a key signal for whether earnings are recovering from months of deflation. However, government spending in China slowed for the second month in a row, making July and August the country’s weakest months this year.
Markets are now betting that the Fed will cut more aggressively than the Reserve Bank of Australia (RBA), which could push U.S. short-term rates below Australia’s cash rate. Historically, such a gap has tended to strengthen the Australian dollar, potentially pressuring the RBA to cut rates more than previously expected. The base case now calls for 0.25% RBA rate cuts in November, February, and May. Still, correction risk remains high for shares, with stretched valuations, public debt worries in the U.S., France, U.K., and Japan, tariff uncertainty, geopolitical risks—including Russia and U.S. secondary oil tariffs—and the looming threat of a U.S. government shutdown at the end of September.
President Trump has also reignited a debate over corporate reporting requirements, advocating for U.S. listed companies to move from quarterly to half-yearly reports to reduce short-termism and costs. While he claims that Chinese companies operate with a longer-term view, it’s worth noting that Chinese listed firms are also required to report quarterly. Australian companies, by contrast, report half-yearly.
As central banks around the world weigh their next moves, the global economy stands at a crossroads. With risk management front and center, policymakers are treading carefully—mindful that there are, as Powell put it, “no risk-free paths now.”
