Fed Watch – 9/19/2025

with lauren saidel-baker

WEEKLY FED WATCH

This week on Fed Watch, Lauren Saidel-Baker analyzes the Fed’s latest 25 basis point rate cut and what it really means for businesses, consumers, and investors. While the headlines focus on policy easing, bond market signals tell a more complex story. Lauren explains why expectations for multiple cuts may be premature, highlights historical examples where rate cuts failed to lower long-term yields, and offers practical advice for those considering borrowing or investment decisions. Are you prepared if rates stay higher for longer?

Key Episode Takeaways

  • 00:02 – Introduction and FOMC rate cut
  • 00:27 – The Fed’s growing internal divide
  • 01:32 – Bond market signals and inflation concerns
  • 02:45 – Historical examples of Fed cuts vs. rising yields
  • 03:48 – Why businesses and consumers may not see relief
  • 04:34 – Inflation pressures and limits on future cuts
  • 05:06 – Conclusion
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We might be seeing a little bit more aspirational movement toward lower rates rather than what the Fed will actually do if in fact inflation is coming back. – Lauren Saidel-Baker Share on X
The general shape of things is getting more and more elongated, there's more distance between the highest expectation and the lowest expectation for where rates will end up. - Lauren Saidel-Baker Share on X

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hi, I’m Lauren Saidel-Baker, and thank you so much for joining me for this September 19th edition of Fed Watch. It’s been a big week. We had the FOMC meeting. We had our 25 basis point rate cut. And if you haven’t seen, we put out a special edition of Fed Watch on Wednesday immediately after that rate cut was announced. So you can get the quick reaction then, but let’s go into a little bit more detail.

We got a lot of messaging out of this meeting and out of the statement, out of the press conference that happened afterward. And really what we’re starting to see is some daylight forming in between the hawks and the doves. Now, given where we are in the economic cycle and given the very pressing conflict between the inflation side of the dual mandate and the labor market side, that tension is straining some of these opinions. But where do we see rates going forward? And just as importantly, what is the market expecting? Well, we can start to answer that question with the summary of economic projections. We have the dot plot of where various Fed officials expect interest rates to end in the next couple of years. We talked a little bit about that dot plot when we recorded our midweek episode on Wednesday, but the general shape of things is getting more and more elongated. That is, there’s more distance between the highest expectation and the lowest expectation for where rates will end up.

So if the Fed itself doesn’t exactly know where rates are going, what path we will see going forward, what is the market to make of that? We’re starting to see some very clear direction coming out of the bond market. And as we have said on this show in the past, we really like what the bond market says. We trust that is very smart money. So we want to pay attention to the signals coming from that market. At this point it seems like there is still an increased focus on the inflation side of things and the concern that inflation will be ramping up in the quarters and years to come. So that tells me that some of these expectations for many, many cuts going forward, that might be premature. We might be seeing a little bit more aspirational movement toward lower rates rather than what the Fed will actually do if in fact inflation is coming back. We’ve seen this in history before. It’s very important not to assume a one-to-one pass through between the federal fund’s target rates and things like government yields, mortgage rates certainly. Those latter items follow a much more supply demand driven dynamic.

So historically, if we look back at these examples of Fed rate cuts that didn’t necessarily pass through to especially something like the long end of the bond market, that’s where we can start to see what this cycle might be like. I’m going to point out two previous examples. The first one’s from 1995 to 1996. There were three 25 basis point cuts in the Federal Reserve target rate, but during that time, the 10-year yield went from 6.17% in June of 1995 to 6.91% in June of 1996. That is an actual increase over the time that the Fed was cutting. We see something similar between 2002 and 2003. There was a 50 basis point cut followed by one 25 basis point cut, but during that same time, the 10-year yield went from 3.94% in October of 2002 to 4.3% in October of 2003.

So there is past precedent that the bond market can give us very clear signals for what is coming. And most importantly, for both businesses and consumers, you’re probably not borrowing right at the federal funds target rate. We’re not all going to the discount window and getting that rate. So if you’re a consumer, a would-be homeowner looking to purchase that mortgage, if you’re a business looking to borrow money to invest, you’re probably more tied to some of these longer-term, more long bond-like rates, and that’s where you shouldn’t be baking in too many rate cuts, too much decline in your interest rates, even if the Federal Reserve were to follow through with additional cuts.

We probably will see some more movement in the federal funds rate. That was very clearly signaled on Wednesday in a lot of the messaging that has come out. But at the end of the day, let’s keep this in perspective. Inflationary pressures are mounting. That’s going to limit the number of cuts we get and certainly going to limit how deep, as we get closer to 2026, these cuts can keep taking place. If you’re not even feeling that full pass-through, well, are you foregoing opportunities at this moment in favor of trying to time that low in borrowing rates?

Don’t make that mistake. Stay ahead of the market. Stay with us here. We’ll be reporting more as we get deeper into this year, right here on ITR Economics Fed Watch.