Fed Chair Jerome Powell’s speech at Jackson Hole, coupled with continued deceleration in the U.S. labor market combined over the last several weeks, significantly raised the probability of a Fed cut coming into today’s meeting. Therefore, the Federal Open Market Committee’s (“FOMC”) decision to cut the fed funds target rate by 25 basis points to 4.0% to 4.25% was no real surprise, and one could argue that the bigger question was how many FOMC voters would have preferred more. The answer it turns out was just one – the newly sworn-in Stephen Miran – while both Michelle Bowman and Christopher Waller, who had dissented in favor of a cut in July, went with the majority in the September meeting.
The statement released following the meeting acknowledged the key driver of the decision: “the shift in the balance of risks.” While acknowledging that “inflation has moved up and remains somewhat elevated,” it was the slower job gains, the move higher in unemployment, and, perhaps most importantly, the judgment that “downside risks to employment have risen” that spurred the FOMC into action.
Changes in the dot plot reflect not only today’s interest cut, but a more accelerated pace moving through 2028. For this year, the dot plot reflects two additional cuts from here, translating to 3.6% by the end of 2025; estimates for the fed funds rate at the end of 2026 and 2027 are 3.4% and 3.1%, respectively. While the expectations for 2025 appear firmly centered around 3.6% with only one meaningful outlier, there is much wider dispersion as one looks out to 2026 and 2027. The implication is that there is still significant uncertainty in the path for both the labor market and inflation, and it will likely be a continued push and pull as each side of the inflation-employment tug of war fights for prominence in the narrative over the next several months.
Interestingly, the quarterly update of economic projections painted a rosier view than the projections released in June. The Fed is now projecting that the US economy will grow by +1.6% in 2025 and +1.8% in 2026, versus June’s projections of +1.4% and +1.6%, respectively. Core PCE is expected to close this year at +3.1% –in line with June’s release – and +2.6% in 2026, slightly higher than last quarter. Perhaps most importantly, the Fed maintained its estimate for the unemployment rate to close the year at 4.5% and to fall modestly in 2026 to 4.4% – hardly cause for significant concern.
During the press conference, Fed Chair Powell emphasized the importance of the dual mandate and admitted that the potential risk of a more protracted deceleration in the U.S. labor market was the rationale for the move towards a more accommodative stance. When attempting to square the increase in growth expectations with the rate cut, Powell admitted that today’s move could be described as a “risk management” cut, which appeared to rankle equity investors who had pushed prices higher immediately following the release of the Fed’s statement. In terms of inflation, Powell continues to lean into the thesis that the goods inflation evident in recent prints is likely to be one-time in nature, and with the low hiring, low firing labor dynamic, wage inflation should remain subdued. Finally, any attempts to engage Powell on the political pressure the Fed is under, the potential conflict represented by Stephen Miran’s dual employment, or a potential probe of the Fed as teased by Treasury Secretary Scott Bessent were swiftly and effectively dispensed with by the Chair with essentially no comment.
In short, today’s announcement was as predicted but perhaps shines a bit of a brighter light on what to expect as we move closer to 2026. Policy uncertainty remains an overhang, and while there are some FOMC voters that appear ready and willing to lean in hard on the labor market, the lack of any real momentum behind a 50 basis point cut supports the view that the Fed remains both independent and cognizant of the challenges another round of structural inflation could bring. Markets were mixed on the news, with U.S. small cap and cyclical equities higher following the press conference; volatility and the NASDAQ were both lower in late session trading. Short yields moved lower, while longer maturities were incrementally higher – likely reflecting longer-term inflation and growth expectations.
