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Outlook • August 2025

Will September Mark 2025’s First Interest Rate Cut?

Report Snapshot

Situation

The U.S. economy has been on a rollercoaster since the start of 2025, with varying levels of GDP, new tariff rates and overall fiscal uncertainty. Meanwhile, the Federal Reserve has held interest rates steady this year.

Finding

While some economic indicators point to a 25-basis point rate cut in September, inflation remains sticky, presenting a potential hurdle for significant interest rate cuts.

Impact

Producers should stress-test cash flows under various interest rate scenarios as they budget for the rest of the year and 2026.

(This information was originally presented on August 15, 2025. Watch the recording here: https://www.youtube.com/watch?v=wFZo4jukFsM)

The strength of the overall U.S. economy is important for farmers’ decision-making. It’s also important for the Federal Reserve’s decision-making regarding interest rates. With increased economic pressure and no rate cuts on the books yet for 2025, producers and consumers alike are wondering if we will see a rate cut soon.

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Macro Update: Inflation and Jobs

The Fed’s dual mandate is price stability within the marketplace and maximum employment.

Inflation remains sticky, with the Fed’s long-run objective of 2% still out of reach.

When evaluating price stability, inflation plays a crucial role. The Fed’s preferred inflation measure is the personal consumption expenditures (PCE) index. The PCE data for July 2025 show that the core rate, which excludes food and energy, is at 2.9%. While this is elevated relative to the Fed’s long term-goal of 2%, it suggests that inflationary pressures are still present.

However, comments from Fed Chair Jerome Powell make it clear that the Fed considers multiple months of datapoints, not just one. When looking at the most recent three months and six months of data annualized for the core PCE, it’s approximately 3%. Therefore, inflation remains sticky, with the Fed’s long-run objective of 2% still out of reach.

Additionally, the July consumer price index (CPI) report was a mixed bag. The all-items index came in as expected at 2.7%. On the other hand, the core CPI, which excludes food and energy, came in a little hotter than expected at 3.1%. Notably, non-housing core services saw their fastest increase since January, rising approximately 4% year over year (YOY). This acceleration in service sector inflation could signal persistent underlying price pressures.

Even though the overall CPI remained muted, the July Producer Price Index (PPI) report came in relatively hot, suggesting the U.S. economy may be starting to feel the effects of tariffs. The PPI measures the average change in prices received by producers for goods and services at the wholesale level, while the CPI tracks the average change in prices paid by consumers at the retail level.

In July, the PPI rose more than expected, increasing by 0.9% on a monthly basis and 3.3% YOY. Notably, gross margins for wholesalers and retailers of consumer goods jumped from 2.9% YOY in June to approximately 6.9% YOY in July. This surge could indicate that tariff-related cost pressures are still moving through the supply chain and may eventually be passed on to consumers.

Supporting this notion is the National Federation of Independent Business’ July Small Business Economic Trends report, which showed a net 28% of small businesses plan to increase prices — well above the historical average and a strong signal of continued inflationary pressure.

While the July unemployment rate remains low at 4.2%, there are clear signs of softening in the U.S. labor market.

While the July unemployment rate remains low at 4.2%, there are clear signs of softening in the U.S. labor market. In July, only 73,000 jobs were added, according to the Bureau of Labor Statistics. Additionally, downward revisions to May and June job figures totaled 250,000, further underscoring the slowdown. Compared with the post-Great Recession monthly average of approximately 152,000 jobs, this marks a notable deceleration in job creation.

However, U.S. weekly jobless claims fell by 5,000 and remain relatively low at 229,000. With hires down 3.1% and layoffs down 4% over the past six months, this could suggest the U.S. labor market is stuck in a low-fire, low-hire environment for the time being.

Will Rate Cuts Restart in September?

So, what does this all mean for the Fed’s decision-making at its next meeting? The Fed will need to be cautious, as inflation risks are to the upside while employment risks are to the downside.

Before the July PPI report was released, the market odds indicated a 99.5% probability that the Fed was going to cut rates by 25 basis points in September, according to the CME FedWatch tool. The odds have since fallen to 87.2% as of August 29. Overall, the market’s likeliest outcome is projecting that the Fed will decrease rates by 50 basis points total in the remaining four meetings of 2025.

The market odds of 50 basis points’ worth of rate cuts for 2025 seem appropriate, and producers with variable interest rates could see slight relief.

While the Fed’s current policy rate remains restrictive, significant crosswinds persist in achieving its dual mandate of price stability and maximum employment.

It seems probable that the Fed will marginally reduce the federal funds rate, but producers are unlikely to see significant interest rate cuts until the Fed is confident that inflation has been tamed or the job market deteriorates further. Therefore, the market odds of 50 basis points’ worth of rate cuts for 2025 seem appropriate, and producers with variable interest rates could see slight relief. However, producers are unlikely to see significant declines in longer-term interest rates.

As producers plan budgets for the remainder of 2025 and into 2026, we recommend these considerations for double-checking your interest rate strategy:

  • Stress-test cash flows under various interest rate scenarios, and make sure that your operational plans do not depend on interest rate cuts for success.
  • In your stress-testing scenarios, utilize the historical spread between the federal funds rate and the prime rate as a starting point. The prime rate, commonly used as a benchmark for consumer lending, is influenced by but not directly tied to the federal funds rate. Over the past 30 years, the prime rate has typically averaged approximately 310 basis points above the federal funds effective rate (100 basis points = 1%).
  • Work with your Farm Credit lender to carefully consider all the loan products available to you to make sure your current products fit your operation and interest rate strategy.
  • If you have upcoming large capital purchases or potential land deals, make sure to talk carefully with your Farm Credit lender in advance to consider the impact of different interest rate scenarios and product options.
  • Keep in mind that interest rate costs will be exacerbated by higher input costs, so efficiency gains on input sourcing and use will also lower the effective interest paid.

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