For investors, the Fed is justified in cutting rates and likely will do so for the remainder of this year as labor markets remain soft.
Following a nine-month hiatus, the Federal Open Market Committee (FOMC) delivered in line with expectations and voted to reduce the Federal funds rate target range by 0.25% to 4.00%-4.25% at its September meeting. Newly appointed governor, Stephen Miran dissented in favor of a larger half-point cut.
Adjustments to the statement language were uncontroversial. It noted economic activity had moderated in the first half of the year; job gains have slowed alongside a small increase in the unemployment rate, though stated downside risks to employment have risen. Inflation was still described as elevated but added language that it has moved up.
Turning to the Summary of Economic Projections, refreshed forecasts were largely unchanged relative to its June meeting:
- Growth was nudged higher by 0.2% to 1.6% and 1.8% for 2025 and 2026.
- The unemployment rate was unchanged at 4.5% in 2025 and revised lower to 4.4% in 2026.
- Both headline and core PCE forecasts held at 3.0% and 3.1% for 2025. Next year saw a slight bump by 0.2% for both to 2.6%, perhaps acknowledging the lagged pass-through effects of increased tariff rates.
- The median interest rate outlook signal two further cuts this year, likely delivered at the final two meetings, and maintained its projection for just one rate cut in 2026 bringing policy rates to 3.25-3.50% by the end of next year.
During the press conference, Chairman Powell emphasized balance given risks to employment were to the downside while risks to inflation are to the upside. He explicitly stated todays cut was a “risk management” ease. In other words, softer labor markets allow the Federal Reserve (Fed) to focus more squarely on employment without abandoning vigilance on inflation.
Elsewhere, the Chair also fielded several politically charged questions centered around Federal Reserve independence and was unsurprisingly dismissive. These concerns are not unfounded, however; Stephen Miran’s recent appointment while still employed at the White House, Lisa Cook’s legal battle to maintain her role on the Board, and persistent attacks at Fed Chair Powell continue to blur the line between the governments influence over the central bank. As a result, while policy adjustments have generally been consensus across Fed governors, this year has seen the most dissents to policy changes since 1993.
This might suggest pressure to favor the Administration’s position on rates going forward, but for now, there aren’t enough political appointees to meaningfully shift the trajectory of Fed policy. For investors, the Fed is justified in cutting rates and likely will do so for the remainder of this year as labor markets remain soft. Moreover, equities have tended to do well while the Fed cuts rates and the economy avoids recession, and short-to-intermediate term yields continue to screen attractive relative to recent history. Therefore, investors should remain well diversified across high quality bonds, reasonably priced stocks, international assets and alternative assets.