The Federal Reserve's decision in September 2025 to cut its benchmark interest rate by 25 basis points to 4.00%-4.25%, marking the first easing since December 2024, has drawn attention from market watchers and policymakers alike.
Fed Chair Jerome Powell framed the move as a "risk management" action, citing emerging signs of weakness in the U.S. labor market, despite the unemployment rate standing at a relatively healthy 4.3% in August 2025. This scenario, where the Fed eases policy amid low unemployment, prompts an examination of past "adjustment" cycles and their implications for financial markets.
Historical Precedent for the Fed's "Adjustment Cuts"
Since the 1970s, the Federal Reserve has implemented a rate cut, viewed as an "adjustment" or "risk management" measure, only twice when the unemployment rate was below 4.6%: in 1998 and 2019. In both instances, the initial rate cut established a clear pattern: it was quickly followed by two additional 25-basis-point cuts, resulting in a total easing of 75 basis points before a subsequent pause.
The 1998 Easing Cycle
The first instance occurred in 1998, prompted by the Russian default and the collapse of Long-Term Capital Management. The Fed's initial cut was in September followed by two more cuts in October and November.
- Unemployment and Treasuries: the unemployment rate continued its decline despite the rate cuts. Treasury markets proved resilient; yields fell ahead of the first two cuts and the yield curve then stabilized or steepened afterward.
- Equity Market Reaction: The S&P 500 had already experienced a nearly 20% drawdown before the first cut. Following the initial easing, stocks briefly re-tested the lows but then began a powerful recovery, surpassing previous highs by mid-December.
The 2019 Easing Cycle
The next occurrence was in 2019. With unemployment at a 50-year low (3.7%) and inflation below the 2% target, the Fed cut rates three times between July and October, citing concerns over slowing global growth and domestic economic activity.
Unemployment and Treasuries: Similar to 1998, the unemployment rate continued to fall after the cuts and remained steady until the COVID-19 disruption in March 2020. However, in contrast to 1998, both 30-year and 10-year Treasury yields increased following the second and third cuts.
- Equity Market Reaction: The S&P 500 experienced a milder, temporary 5.6% drawdown after the first cut. However, it quickly rebounded, achieving a new high by October.
In both 1998 and 2019, the impact on equities showed a similar trend: an initial decline or re-test of lows was followed by a strong recovery.
The December Decision
The Fed’s recent back-to-back rate cuts in September and October 2025 are consistent with the historical pattern of "risk management" adjustments. This sequence raises a key market question: will the Fed follow the historical playbook and deliver a third 25-basis-point cut in December 2025 before halting its easing cycle?
The central bank faces a crucial decision. They must determine whether the current economic situation – marked by a relatively low unemployment rate but signs of a weakening labor market – justifies a decisive third rate reduction. Markets are keenly focused on whether the Fed will adhere to this same three-step easing sequence or deviate from the historical precedent this time.
OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.
All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).