Economic commentary

September 18, 2025

The Fed restarts the easing cycle

By NAB Group Economics

The US Federal Reserve reduced the federal funds rate by 25bp this week, the first cut since December 2024. The move reflects concerns that downside risks to the labour market have increased and that a less restrictive policy setting policy is needed to better balance the risks to the Fed’s dual mandate. We expect further rate reductions this year (-50bp) and, after a pause at the start, next year (also -50bps, for a cumulative -100bp).

While the Fed is restarting its easing cycle, other central banks are drawing close to ending or pausing rate cuts – this includes the European Central Bank (ECB) and the Bank of England (BoE). Similarly, while the Bank of Canada (BoC) also cut rates this week, after having been on pause, we only expect one more cut. The Bank of Japan is moving in the other direction – policy is loose and with inflation high it is likely to gradually raise rates.

Global activity data continues to be resilient and this month our forecast for 2025 global growth ticked up 0.1 ppt to 3.2% (with the 2026 and 2027 forecasts unchanged at 2.9% and 3.0% respectively). This reflects upwards revisions to previously reported GDP data and higher than expected growth in India for Q2, as well as solid US activity data early in Q3. Growth in the first half of the year was supported by a bringing forward of activity ahead of US tariffs, policy support in China, and AI related investment and production.

Even so, US growth is tracking at a slower pace this year than in 2024, the impact on Canada of US tariffs have become evident with a Q2 fall in GDP, and China activity data for Q3 have notably weakened as the bringing forward in activity from policy measures unwinds. US tariffs increased again in August and the shift in tariffs still represents a headwind for global growth. As a result, we expect growth to ease in H2 but, with fiscal policy set to become more supportive later this year and into 2026, and tariff impacts likely to fade over time, growth should then move higher over 2026.

The error margin around any set of economic forecasts remains high. While risks of extreme US tariff outcomes have eased, trade policy uncertainty remains high and further tariff measures are likely. There is a concern that the weakening in the US jobs market is a harbinger of weaker activity growth. Many governments still have large budget deficits, leaving fiscal policy room constrained and any perceived loss of fiscal discipline could see a negative financial market reaction. Upside risks come from the AI roll-out, and potential productivity benefits from this investment, and the easing of tariff fears may see investments (in labour or capital) that had been delayed being reinstated.

For further details please see the Forward View Global (September 2025) (PDF, 1MB), opens in new window

 Economic commentary