Last month, the Federal Reserve’s (Fed) policy-setting body decided to cut interest rates by 25 basis points to 4.00%-4.25%, easing monetary policy for the first time since December 2024. Fed Chair Jerome Powell described the rate cut as a “risk management” move amid the U.S. labor market showing signs of weakness.
The widely expected rate cut came on the heels of data showing the unemployment rate rising slightly to 4.3% in August 2025 from 4.2% in July (see our related article U-3 unemployment rate). To put this in perspective, between May 2024 and July 2025, the unemployment rate ranged between 4% and 4.2%, after bottoming at 3.4% in April 2023. By historical standards, 4.3% is considered a relatively healthy unemployment rate. The natural rate of unemployment (also known as full unemployment) has declined over the decades but is currently estimated to be around the 4.3% to 4.5% level.1
Besides the unemployment rate increasing, other metrics are also showing the labor market slowing down, such as the duration of unemployment increased to 24.5 weeks in August 2025 versus 21 weeks in August 2024, the highest since April 2022. The continuing unemployment claims are at the highest level since the fall of 2021. This is supported by the U-6 unemployment rate increasing to 8.1% in August from 7.9% in July. This means, once a worker is unemployed, it’s taking longer to find a new job.
The Fed has two mandates, maximum employment and price stability. The second task has been challenging, with inflation elevated above the 2% target since 2021. At the time of the rate cut on September 17, 2025, the headline personal consumption expenditures (PCE) price index and Consumer Price Index (CPI) on a year-on-year basis stood at 2.6% for July and 2.9% for August, respectively.
In the past, the Fed has referred to these momentary actions of rate increases, or rate decreases, as “risk management,” “adjustments,” or “mid-cycle adjustments.”
For the Fed to cut rates in a relatively low unemployment rate environment like today, brings up four questions:
- How often has the Fed cut when the unemployment rate was below 4.6%?
- After the first adjustment cut, how many more times did the Fed cut in the near term?
- What impact did it have on the Treasury markets?
- How did the equity markets react during these adjustment periods?
How often has the Fed cut rates when the unemployment rate was below 4.6%?
The “adjusted” rate cuts were usually due to either increased geopolitical tensions or some economic metrics beginning to show signs of a slowdown. These adjustments may occur at moments when the Fed tries to balance between their two mandates.
Since the 1970s, the Fed has cut rates only three times when the unemployment rate was below 4.6%, as an “adjustment” as noted in Figure 1.
Figure 1: FOMC rates “adjustments “when the Unemployment was below 4.6%
| Date | Unemployment Rate | Cut | More cuts? | Result of Unemployment |
|---|---|---|---|---|
| 9/29/1998 | 4.5% | 25 bps | 2 more cuts by Nov. Total of 75 bps | Declined |
| 7/31/2019 | 3.7% | 25 bps | 2 more cuts by Nov. Total of 75 bps. | Declined |
| 9/17/2025 | 4.3% | 25 bps | N/A | N/A |
Source: Bloomberg Professional (FDTRMID, USURTOT)
The 1998 Rate Adjustment
On August 17, 1998, Russia devalued their currency, defaulted on ruble-denominated debt, and suspended payments to foreign creditors of Russian financial institutions causing a shock to the global markets.2 This was followed with credit spreads widening and the downfall of high-profile hedge fund Long-Term Capital Management.
The Fed Funds rate remained at 5.5% from March 25, 1997, until the September 29, 1998, meeting of the Federal Open Market Committee (FOMC) when then Fed Chair Alan Greenspan cut the Fed Funds rate by 25 basis points from 5.5% to 5.25% due to the Russian default crisis3 and “to cushion the effects on prospective economic growth in the United States of increasing weakness in foreign economies and of less accommodative financial conditions domestically.”4 This was followed by two more 25-basis-point cuts on October 15, 1998 (occurring between FOMC meetings) and again on November 17, 1998, with a Fed Funds rate cut to 4.75%.
After the rate increase in March of 1997, U.S. Treasury rates declined prior and during the first two cuts in 1998 and then increased just before the third cut and continued to move higher (Figure 2). During the period, the unemployment rate continued to decline.
Figure 2: U.S. Treasury Yields Jan 2, 1997, to June 1, 1999
The July 2019 Rate Adjustment
As of July 31, 2019, the unemployment rate was at an historically low rate of 3.7%, and the June PCE and CPI rates were at 1.4% and 1.6% rates, respectively. The Fed cut their policy mid-rate by 25 basis points to 2.125%, followed by two more 25-basis-point cuts in September and October with a Fed Funds mid-rate at 1.625%.
The Fed cut rates three times in 2019 despite a very strong job market, with unemployment at a 50-year low. Per the July 2019 FOMC minutes, the reason for cutting rates in 2019 included “signs of deceleration in economic activity in recent quarters”; “A pronounced slowing in economic growth in overseas economies”; a concern inflation was running below the 2% target for an extended time; the FOMC decided this was a “prudent risk-management” decision.5
Prior to July 2019, the Fed’s previous rate move was in December of 2018, when they increased the Fed Funds mid-rate from 2.125% to 2.375%.
During the 2019 adjustment, the unemployment rate declined from 3.7% to 3.5% until March 2020, when it increased to 4.4% as COVID-19 entered our lexicon.
The 30-year Treasury yield increased after the second Fed cut, and the 10-year yield increased after the third Fed cut (Figure 3).
Figure 3: U.S. Treasury Yields Jan 1, 2019, to April 13, 2020
The September 2025 Rate Adjustment
The most recent adjustment was a 25-basis point cut on September 17, 2025, due to various economic measurements suggesting the labor market is slowing. At the ensuing press conference, Powell mentioned that after the last several years of the Fed’s focus on price stability, the central bank now sees the labor market as an increased downside risk. Figure 4 shows the Fed policy rate and Treasury yield curve prior to the recent Fed “risk management” cut. The longer end of the curve moved higher after the rate easing in the fall of 2024. Since September 17, the yield curve has generally moved higher.
Figure 4: U.S. Treasury Yields Jan 1, 2022, to Oct 2, 2025
The black dotted circles in Figure 5 note the moments when the Fed adjustment rate cuts occurred and what happened to the Fed Funds rate and the Unemployment rate over the following months.
Figure 5: Fed Funds Rate and the Unemployment Rate During Adjustment Cuts
When Russia devalued the ruble on August 17, 1998, the S&P 500 index (SPX) was already in a 10.4% correction by August 14 from its peak on July 17 and bottomed on August 31 with a 19.3% decline (Figure 6). The SPX re-tested the lows on October 8 just before the Fed’s second quarter-point cut on October 15, 1998. This was followed with stocks recovering and by mid-December, the SPX exceeded its previous high.
Figure 6: SPX Daily Prices & Fed Funds Jan 1, 1997, to Dec 31, 1999
Prior to the July 2019 rate cut, the SPX was moving sideways to slightly higher. On July 26, 2019, equities peaked and then declined by 1.5% by the Fed’s adjustment rate cut on July 31. However, the SPX bottomed on August 14 with a 5.6% drawdown and reached a new high on October 28 (Figure 7).
Figure 7: SPX Daily Prices Jan 2, 2019, to Jan 31, 2020
Summary
In past years, the Fed has enacted a 25-basis policy adjustment while the unemployment rate was below 4.6%. This was followed by two more 25-basis-point cuts. Following the adjustment cuts, the yield curve tended to be stable to steeper in the following months. Will the Fed follow previous adjustments and cut 25 basis points two more times over the next several months?
References
- https://fred.stlouisfed.org/series/NROU
- https://www.chicagofed.org/publications/economic-perspectives/2001/1qepart1
- https://www.richmondfed.org/publications/research/economic_quarterly/2002/fall/goodfriend
- https://www.federalreserve.gov/boarddocs/press/general/1998/19980929/
- https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20190731.pdf
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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
