The faces a pivotal moment at its July 29–30 meeting. remains above the official 2 percent target, political pressure is building, and investors are watching for clarity. With the Federal Funds rate holding steady at 4.25 to 4.5 percent for five straight meetings, the Fed is expected to pause again.
But behind that pause, the discussion is shifting to timing. Markets anticipate the first by September. I believe that a rate cut should happen, not just because markets expect it, but because economic conditions demand it. The current policy stance is too tight and increasingly misaligned with today’s inflation dynamics, industrial signals, and broader macro trends.
Here are seven reasons why a September rate cut is not only justified but necessary.
1. Inflation Has Effectively Returned to Target
and , both at 2.7 percent in June 2025, are inflated by housing costs, such as imputed rent —the estimated cost homeowners would pay to rent their own homes, which lags real-time market conditions. Using a European-style Harmonized Index of Consumer Prices (HICP), which excludes these costs, U.S. inflation is 1.8 percent, matching the Euro area’s level in September 2024, which prompted the ECB to cut its rate to 3.25 percent [ECB, October 2024]. With the Federal Funds rate at 4.5 percent, real rates near 2.7 percent are excessively restrictive, stifling growth when inflation is effectively at target. A September cut would align policy with this reality.
2. Tariffs Are Functioning as a Tax on the Economy
Roughly $400 billion in tariffs remain in place, creating a direct cost burden on U.S. businesses and consumers. As of July, average rates stand between 15.8% and 20.6%, the highest since 1910. This tax drag is adding 0.4 to 0.6 percentage points to CPI through 2026, according to the Yale Budget Lab. Recent data indicate that price pressures are rising in trade-sensitive categories, such as apparel and appliances. With fiscal drag weighing on growth, monetary policy should provide balance. A rate cut in September would help counteract the effects of tariffs without undermining the Fed’s inflation credibility.
3. The Housing Market Is in a Structural Depression
Over the last decade, fifteen million households have formed, but only 13 million homes have been built. With mortgage rates at 6.7 percent and median home prices at a record $435,300, the housing market is effectively frozen. Existing home sales fell 2.7 percent in June 2025, while builder confidence remains low at 42. The sector lacks affordability, mobility, and flexibility in credit. Housing is not just a consumer issue, it’s a growth engine. Monetary policy is now a barrier. A September cut would relieve some pressure and restore balance to housing fundamentals.
4. The 1998 Greenspan Pivot Offers a Playbook
In 1998, the Fed lowered rates from 5.5 to 4.75 percent despite no formal recession, responding to the liquidity stress caused by the LTCM crisis. Inflation was just 1.5 percent at the time. That pre-emptive move helped stabilise markets and extend the cycle. Today’s inflation, adjusted for housing distortions, is at a similar level. Financial conditions are tight, and the U.S. economy shows signs of softening beneath the surface. Acting in September would send a signal that the Fed remains proactive and data-driven, rather than reactive and politically cornered.
5. Market Pessimism Suggests Policy Is Too Tight
Despite new highs in equities, sentiment is mixed. The AAII Investor Sentiment Survey shows just 36.8 percent of respondents are bullish, while 34 percent remain bearish. This narrow spread reflects persistent recession fears and tariff anxiety. In previous cycles, similar pessimism coincided with over-tightening. The Fed risks misreading market resilience as economic strength. If true inflation is 1.8 percent, the current policy is not neutral; it is contracting. Cutting in September would recalibrate expectations and support continued expansion.
6. Manufacturing Signals Ongoing Weakness
The registered 49.0 in June 2025, marking the fourth consecutive month of contraction after brief expansions in January and February. This follows a historic 26-month contraction from November 2022 to December 2024, the longest on record. Beneath the headline, conditions remain soft: new orders fell to 46.4 while the employment index dropped to 45.0, signaling weakening demand and rising layoffs. Tariffs, now averaging 15.8 to 20.6 percent, are pushing input costs higher, with the PMI Prices Index jumping to 69.7 in June. This combination of weak demand and rising costs is straining industrial output. A September rate cut would ease burdens and prevent spillover into broader economic activity.
7. Policy Tools Are Misaligned
The current setup is structurally inconsistent. Interest rates are at 4.5 percent, mortgage rates near 6.7 percent, tariffs are at century highs, and ISM manufacturing remains in contraction. All of these forces are suppressing growth at the same time. Meanwhile, true inflation, measured globally, is already at or below target. This misalignment threatens to choke off momentum and risks tightening into weakness. A would restore some symmetry between policy intent and economic reality.
Final Thought: September Is the Right Time to Act
The Fed is widely expected to hold in July, with CME FedWatch pricing in a 95 percent probability. However, inflation and labor data between now and September could unlock the runway for a quarter-point cut. The ECB began easing at 1.8 percent inflation, and the U.S. is arguably already there using international standards. A well-timed cut in September would support growth, ease housing and industrial stress, and bring policy back into balance with a changing economy.