The Fed cut its policy rate by 25 bps to 4.00–4.25%, with newly appointed Governor Stephen Miran dissenting in favour of a larger 50-bp cut.
With inflation risks easing, the Fed is shifting away from a restrictive stance to manage the risks of a slowing labour market.
The dot plot signals another 50 bps of cuts this year, followed by an additional 25 bps in 2026, while the Fed’s baseline growth and inflation outlook remains broadly steady.
Mixed signals of rising inflation and a weakening labour market may complicate the Fed’s policy trajectory.
We now expect a further 50-bp of cuts by year-end, with 10-year UST yields maintaining a mild downward bias and MGS yield broadly stable, anchoring USD/MYR near 4.20.
We see risk that markets may have overshot in pricing cuts, in which a reversal of expectations could pressure the ringgit. Overall, we see limited impact on BNM’s OPR outlook, which remains accommodative following July’s pre-emptive 25-bp cut.
The beginning of easing cycle
As widely anticipated, the Federal Reserve voted 11–1 to reduce the federal funds target range by 25 bps to 4.00–4.25%, with newly appointed Governor Stephen Miran dissenting in favour of a larger 50-bp move. This marks the first rate cut since Dec-24 and likely signals the start of a new easing cycle, underscoring the Fed’s pivot towards preserving labour market strength while balancing still-elevated inflation pressures.
Fed’s focus shifts from inflation to employment
The Fed’s decision to cut was guided by its assessment that “downside risks to employment have risen.” Chair Powell stressed that policy has been skewed towards inflation for a long time, but that “the risks of higher and more persistent inflation have probably become a little less.” He noted that policy had remained “restrictive” this year, but given labour-market risks, the Fed is now “moving to a neutral policy.” His remarks signal a clear shift in focus towards managing the risks of a slowing labour market.
Fed increasingly dovish
The dot plot now signals 50 bps of additional easing by end-2025 (median rate: 3.6%), followed by a further 25 bps in 2026 (median: 3.4%), taking the policy rate down to 3.25%–3.50%. This represents one extra 25-bp cut in 2025 versus the July projection.
Despite the lower rate path, the Fed’s baseline outlook remains broadly steady. Annual GDP growth has been revised up, but unemployment and PCE inflation forecasts for 2025 are unchanged (Fig. 2). This suggests the Fed still views economic and inflation conditions as stable but is using rate cuts as risk management in light of rising downside risks to employment.
Mixed data could complicate Fed’s easing trajectory
Recent data highlight the Fed’s challenge in balancing its dual mandate of maximum employment and stable prices. Nonfarm payrolls rose just 22k in August (consensus: 75k), while the unemployment rate climbed to a near four-year high of 4.3%. At the same time, headline CPI ticked up to +2.9% YoY in August (July: +2.7%), pointing to tariff-related inflation risks. Meanwhile, retail sales surprised to the upside with a 0.6% MoM gain in August, underscoring consumer resilience. We think the discrepancy partly reflects the wealth effect from buoyant equity markets supporting upper-income spending, even as weaker labour market conditions weigh on lower-income groups. Taken together, these mixed signals may complicate the Fed’s policy trajectory.
Expect another two rate cuts in 2025; support for ringgit
Markets had largely priced in the September cut. The 10-year UST yield has fallen 21 bps MTD to 4.02%, while broad dollar weakness has lifted the USD/MYR by 0.9% MTD to 4.19.
Given increasing signs of softer labour and a more dovish Fed, we now expect a 25-bp cut in October and another 25-bp cut in December, bringing cumulative cuts to 75 bps in 2025 (50 bps previously). This is broadly in line with Fed funds futures, which price in 80% chance of two more cuts by December 2025. Under this scenario, we expect UST to maintain a mild downward bias and MGS yields to stay broadly stable, anchoring USD/MYR near 4.20.
Risks of an overshoot in rate-cut expectations
Notwithstanding the dovish Fed, its rate-cut trajectory remains fluid, reflected in the wide dispersion of the dot plot (Fig. 3). Nearly half of participants project the policy rate ending 2025 above the median 3.50-3.75%.
Given the mixed data, particularly resilient consumer spending alongside weakening labour market conditions, we see a risk that markets have overshot in pricing cuts. A reversal of those expectations could unwind part of the Treasury rally and pressure the ringgit towards 4.30. Overall, we see limited impact on BNM’s OPR outlook, as policy remains accommodative following July’s pre-emptive 25-bp cut.
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.210441 | 4.239882 |
| EUR | 4.923515 | 4.928567 |
| CNY | 0.592481 | 0.593084 |
| HKD | 0.542037 | 0.545833 |
| SGD | 3.252915 | 3.275864 |