Federal Reserve Consensus Review – August 2025

Source: perplexity.ai

Key Outcomes of the 2025 Policy Framework Review

The Federal Reserve completed its five-yearly consensus review with notable changes:
- The framework removed language about the effective lower bound (ELB), focusing instead on promoting maximum employment and stable prices under flexible economic conditions.
- The “makeup” inflation strategy introduced in 2020 (aiming for intentional moderate inflation overshoot) was abandoned. The Committee reaffirmed its commitment to flexible inflation targeting.
- Powell emphasized that anchored inflation expectations were essential in bringing inflation down without sharply increasing unemployment, and the revised statement stresses maintaining well-anchored long-term inflation expectations.
- No specific numerical employment target will be set, reaffirming that maximum employment levels fluctuate for reasons unrelated to monetary policy.
- In periods when inflation and employment targets conflict, the Fed will pursue a “balanced approach” based on the degree and time horizon of each goal’s return to target.federalreserve+2

Interest Rate Policy and Immediate Outlook

September 2025 Rate Cut Expected: Markets and analysts have broadly priced in a 25 basis point rate cut at the September 17 meeting, with a 61–70% consensus probability. There may be a second cut by year-end, but confidence has waned due to slightly firmer labor market data and inflation trends. FedWatch previously saw the odds as high as 99% after weak July inflation.forbes+2
Current Rate and Projections:
- The federal funds rate is 4.50%, with market consensus expecting it to fall to 4.25% in September and potentially lower through 2026. Long-term projections trend toward 3.75% in 2026 and 3.50% in 2027.tradingeconomics+1
- The FOMC minutes indicate most policymakers support limited cuts, contingent on incoming employment and inflation data. Some dissent exists, with a minority favoring immediate reductions to counter a softening labor market.cnbc+1
- Fed Chair Powell cited “a shift in the balance of risks” and uncertainty, indicating openness to cutting rates but emphasizing data dependency.cnbc+2

Economic Context

Inflation Trends: Annual inflation accelerated to 2.7% in June and core inflation reached 2.9%. The inflation risks, labor market weakness, and global trade tensions (including tariffs) factor into the Fed’s cautious approach.forbes+1
Labor Market: While job growth has slowed moderately, the Fed considers conditions “robust” but is prepared to ease policy if employment deteriorates substantially. A 4.4% unemployment rate could trigger a larger rate cut.jpmorgan
Market Impacts: Fed announcements cause significant market moves; dovish signals tend to boost equities, especially large technology firms, while hawkishness can sharply reduce valuations.

Strategic Shifts

The Fed reaffirmed flexible inflation targeting over the previous “makeup” approach, highlighting readiness to act decisively to maintain stable long-term expectations and support both mandate goals in balance.reuters+1
The removal of explicit low-rate language reflects a recognition of higher inflation pressures and reduced likelihood of prolonged zero-rate environments.

Consensus Summary Table

Aspect	2025 Review Outcomefederalreserve+2	Rate Policy Expectationsforbes+3
Framework Philosophy	Flexible inflation targeting, balanced dual mandate, anchored expectations	Early signals for 1-2 cuts (25bp each) in H2 2025
Inflation Target	Remains at 2%, no change	June: 2.7% headline, 2.9% core
Employment Target	No numeric goal; balanced approach	Rate cuts contingent on labor weakness
Current Rate	Not addressed in review	4.50% (August 2025)
Consensus Forecast	Strong chance of September cut, possible December follow-up	Rates trend to 3.75% in 2026, 3.5% in 2027

In summary, the Federal Reserve’s 2025 consensus review reverts to a more traditional framework with flexible inflation targeting, away from “makeup” strategies and ultra-low rate language, while consensus strongly expects measured rate cuts if warranted by economic data, with September’s meeting pivotal.federalreserve+12

Bankwatch

PRODUCTIVITY Progress in era of Artificial Intelligence