Federal Reserve moves forward with first federal funds rate reduction of 2025

Following comments made by Chairman Jay Powell in late August, suggesting that the Federal Reserve was possibly open to reducing the target rate for its federal funds rate, the Federal Reserve today decided to lower the rate, which comes from its Federal Open Market Committee (FOMC), to 4.0%-to-4.25%.

This represents a shift from previous Fed meetings. In late July, it kept the rate at 4.25%-to-4.5%, which marked the fifth time in 2025 rates remained unchanged. Which was preceded by three consecutive rate cuts in 2024, including: a reduction to 4.75%-to-4.5% in September; a reduction from 4.50%-to-4.75% in November; and a reduction to 4.25%-to-4.50% in December. This represents the first rate cut in 2025.

Eleven of the Federal Reserve board members voted to cut the rate by 0.25% with one other board member voting to lower the rate by 0.5%.

While concerns regarding the economy, driven in large part by ongoing tariffs and trade policy, which many industry stakeholders view as increasing supply chain uncertainty on myriad levels, bringing inflation down remains a key objective for the Federal Reserve, at a time when much remains in flux, for various reasons.

The Fed explained that recent indicators suggest that growth of economic activity moderated in the first half of the year. 

“Job gains have slowed and, the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen.”

Federal Reserve Chairman Jay Powell said changes to government policies continue to evolve, and their effects on the economy remain uncertain, adding that higher tariffs have begun to push up prices in some categories of goods, but their overall effects on economic activity and inflation remain to be seen. 

“A reasonable base case is that the effects on inflation will be relatively short-lived—a one-time shift in the price level,” said Powell. “But it is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed.  Our obligation is to ensure that a one-time increase in the price level does not become an ongoing inflation problem.”

As for whether the freight economy and supply chain throughput will benefit from this rate cut, Paul Bingham, Director, Transportation Consulting, at S&P Global Market Intelligence, told LM that the reduction in rates will help reduce cost of capital for firms managing inventory costs and making investment decisions.

“Both will consequently be at higher levels than without the rate reduction,” he said. “Lower consumer credit costs also aid affordability of debt-financed purchases supporting stronger personal consumption expenditures and a higher level of retail sales. The magnitude of this September interest rate reduction is limited and will not itself dramatically affect the goods portion of the economy in the short run. It is more a signal of further rate reductions to follow providing greater monetary stimulus subsequently for the economy that businesses can take into account in purchasing and investment decision-making, leading to higher freight demand.”

Bingham added that heading into today’s Fed meeting, S&P Global macroeconomists anticipated a 0.25% rate reduction.

And Keith Prather, Managing Director, Armada Corporate Intelligence, also noted that the reduction was in line with expectations.

Prather said that in the Fed’s outlook GDP looks to slightly inched up in 2026, to 1.8 from 1.5, explaining it is at a rate that is nothing significant. He also observed that inflation expectations remained unchanged, save for running “a bit hotter,” at 2.6%, compared to 2.4% in its previous outlook, calling it “still warm,” with the Fed largely concerned about wage growth, employment, and the labor market.

Prior to today’s announcement, Matt Muenster, Chief Economist for Green Bay, Wisc.-based Breakthrough, said a rate cut could provide optimism for freight transportation stakeholders, noting that it could create some excitement in the market.

If anyone has been wanting to move more tonnage and has not been able to, I am sure this will be looked at as a sign for hope,” he said. “I would say there are long legs between these cuts being made and their ultimate impact on the costs of borrowing. Long legs and more cuts are going to be needed if we are really going to see a profound impact on next year’s housing market, for example. That has been part of the freight ecosystem and it has been slow, in terms of things like building products.

Until there is more action, we wouldn’t fundamentally change our expectations for next year’s freight market. We still think it is going to be a gradual recovery into 2026, and we are expecting gradual rate growth in 2026. This does not change our perspective. It feels like things are at 50-50 in terms of a 0.25% rate cut [in September], with maybe another matching one in October. So maybe we see a 0.50% reduction by the end of the year, if the macro-environment plays out the way we think it will without too many surprises.”

As previously reported, a recently-conducted Logistics Management reader survey of more than 100 freight transportation, logistics, and supply chain stakeholders found that 63% of respondents felt a rate cut would help, with 37% saying it would not.

Reasons cited for the former included: access to cheaper capital helping the sector and various businesses; reducing interest payments and improving cash flow; spurring housing sector growth; and improving consumer demand, among others. And reasons for the latter included: labor issues not subject to interest rates and deflation, among others.