Global Economic Slowdown?
- Lakshay Sharma
- Sep 23
- 6 min read
Updated: Oct 10
In the September meeting of the FOMC, the U.S. Federal Reserve cuts it's benchmark federal fund rates by 0.25 percentage points. The target range has been lowered from 4.25 - 4.50% to 4.00 - 4.25% now. This has been the fed's first reduction since December 2024. Keep reading to learn about why this decision was made and what are going to be its implication on the markets – Foreign and Domestic both.
Why the cut was made
Employment Slowdown
The Fed’s rate-cut decision was driven largely by worries about a cooling job market. Recent economic data showed that hiring has slowed, job gains have weakened, and unemployment has crept up to about 4.3%. A major revision of labor statistics revealed hundreds of thousands fewer jobs were created over the past year than initially reported, suggesting the labor market is on a decline. Fed Chair Jerome Powell explained that the shift in labor market conditions was the key catalyst for cutting rates
Inflation on Rise
On the other hand, the Fed's projections put inflation ending this year at 3%, well above the central bank's 2% target, while its projection for economic growth was slightly higher at 1.6% versus 1.4%. From housing to food, the U.S. consumer prices increased by the most in seven months, resulting in the biggest year-on-year increase in inflation since January.
Stagflation Risks
The combined conditions of a softening labor market with inflation still on the rise, impose a risk of Stagflation in the economy. "The Fed is in a tough spot. They expect stagflation, or higher inflation and a weaker labor market. That is not a great environment for financial assets."
~ Jack McIntyre, portfolio manager at Brandywine Global Investment Management.
Political Pressure
President Trump repeatedly called for swifter rate cuts, arguing that high borrowing rates were burdening consumers, businesses, and industries sensitive to interest costs. He publicly criticized what he viewed as an overly cautious, urging easing in the rates to stimulate growth in the US economy.
Key Changes Announced
Rate Relaxation
At the Federal Open Market Committee (FOMC) meeting, policymakers voted 11–1 to approve the quarter-point rate cut, bringing the federal funds rate down to a 4.0%–4.25% range (The lone dissenter actually wanted an even larger, half-percent cut, reflecting some debate within the Fed about how quickly to ease up.) This marked a turning point after five consecutive meetings earlier in the year where rates were held steady
Future Projections
Beyond the rate cut itself, the Fed’s updated Summary of Economic Projections introduced some other important changes. Fed officials now project two additional quarter-point rate cuts in 2025 and only one more cut in 2026. In other words, if the economy evolves as expected, this week’s cut might not be the last easing we see in the coming months. However, this outlook was actually less aggressive than financial markets had anticipated, investors had been betting on a faster and deeper series of cuts (around five cuts through 2026) before the meeting. The Fed’s forecasts also showed that officials expect unemployment to tick up only slightly to ~4.5% by year-end and then improve again in 2026
Inflationary Measures
Inflation, measured by the Fed’s preferred PCE index, is still projected at 3% for this year – above the 2% goal – and around 2.6% next year. In fact, by the Fed’s median forecasts, they don’t see inflation returning to 2% until at least 2027 or 2028. This underscores that while the Fed is easing, it believes the battle with inflation is not fully won and will be a years-long effort. Chairman Powell described the rate cut as a “risk management” move – a preventive step to cushion the job market – rather than a signal that inflation is no longer a concern
Summary of Projections
Current Rate: As of September 2025, the effective federal funds rate is approximately 4.33%. Market expectations indicate a potential quarter-point reduction in the upcoming FOMC meeting, with further cuts anticipated into early 2026.
End of 2025: Expected federal funds rate around 3.7%.
Late 2026 to 2027: Projected to decline further to approximately 2.9% to 3%.
Long-term Stability: The longer-run policy rate is expected to center near 3%.
These projections are based on the FOMC's assessments of economic conditions, including inflation and employment, and are subject to change based on new economic data and developments.
What this means for the economy (medium - long term)
Lower borrowing costs
A Fed rate cut lowers global borrowing costs over time, encouraging companies to invest and households to refinance or spend.
The effect is gradual and depends on whether inflation continues to cool. Rates remain well above the near-zero levels of the 2010s, so this is supportive but not a flood of cheap money.
Money flows between countries
Softer U.S. policy usually makes emerging markets like India more attractive. That can mean stronger equity inflows and steadier currency trends.
The initial rupee dip shows that capital flows won’t automatically surge; investors still want proof that inflation is under control and that global growth is resilient.
Export-linked industries benefit
Export-oriented sectors like pharmaceuticals, specialty chemicals and manufacturing stand to gain as U.S. demand and global liquidity improve.
IT services, however, face other problems like weaker global tech spending and a new $100,000 U.S. H-1B visa fee on new applications. So their long-term outlook is more complicated even though they saw a short-term bump.
Inflation is the balancing factor:
If price pressures cool, both the Fed and the Reserve Bank of India will have more room to cut further, reinforcing growth.
Persistent inflation, however, could stall or even reverse easing, which would cap the benefit for equities and bonds.
The long-term investor’s takeaway
Quality over quick trades
Focus on companies with strong cash flows, modest debt, and a proven ability to weather policy and currency swings.
Sector selection
Pharma, consumer staples, and well-diversified exporters look better positioned for long term than firms tied to discretionary tech budgets or visa-sensitive models.
Balanced portfolio
Lower global rates can eventually soften bond yields, improving medium- to long-duration fixed income returns. Diversification across geographies and asset classes remains key to managing currency and policy risks.
Looking Ahead
The Fed’s latest move has sparked plenty of speculation about what comes next. Officially, the central bank has opened the door to more easing – as noted, their median forecast suggests a couple more cuts over the coming year. Powell emphasized that any further action will depend on how the data evolves. If the labor market continues to weaken or if a recession threat looms, the Fed could very well cut rates again at upcoming meetings. Many on Wall Street are already predicting that the Fed will indeed have to lower rates multiple times in the next 6–12 months (more than the Fed’s own forecast), especially if inflation shows signs of cooling. However, there’s a big element of wait-and-see.
Expert projections for the economy are split. Optimists believe the U.S. might achieve a “soft landing” – cooling inflation without a major recession – especially if the Fed’s gentle rate cuts prop up the job market. In that scenario, growth could perk up next year and inflation could glide down, a combo that would be bullish for stocks (particularly those growth stocks) and benign for bonds. Indeed, the Fed modestly upgraded its GDP growth forecast for this year (to 1.6% from 1.4%) even as it eased policy, a sign that a severe downturn isn’t expected. Pessimists, on the other hand, worry that the Fed might be “behind the curve” on inflation – cutting rates while prices are still well above target could risk a resurgence of inflation or a stagflation-like mix of high prices and weak growth. If that happens, financial markets could face more turmoil.
Bottom line
For now, the predominant expectation is that the Fed will proceed cautiously. The next few months of economic data – on jobs, consumer spending, and inflation – will heavily influence whether another rate cut comes in the following Fed meetings.
The silver lining is that the Fed has shown it is willing to act to sustain the expansion. As one analyst quipped, the Fed’s message can be summed up as: “We have your back, but we’re keeping an eye on prices.” In practical terms, that means interest rates are unlikely to shoot back up anytime soon, and further gradual cuts are more likely than not, as long as inflation doesn’t surprise on the upside.
The Fed’s September 17 rate cut provided a gentle boost, not a dramatic surge. For the broader economy, it eases financial conditions and supports growth, but the impact will unfold gradually and will depend on how inflation and global trade conditions develop.
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