Market Views from the Global Fixed Income, Currency & Commodities (GFICC) group
The Federal Open Market Committee (FOMC) voted to cut the federal funds rate target range by 25 basis points (bps) to 4.00% – 4.25%. There was one dissent in favor of 50 bps submitted by newly appointed Governor Stephen Miran who replaced former Governor Adriana Kugler.
Changes to the FOMC Statement:
- The Federal Reserve (Fed) evaluated that job growth has slowed and downside risks to employment have risen.
- The Fed also noted that inflation has moved and remains elevated, but the balance of risks have shifted more towards downside risks to employment than upside risks to inflation, thereby justifying a reduction in the policy rate.
Summary of Economic Projections:
- Investors received FOMC participants’ outlooks for employment, growth, and inflation. Relative to June, participants generally upgraded their growth and inflation forecasts and reduced their unemployment forecasts, but continue to show a convergence towards an equilibrium of around 2% growth, 4% unemployment, 2% inflation, and a 3% Fed Funds Rate over the next few years.
- The Core Personal Consumption Expenditures (PCE) Inflation forecast was maintained at 3.1 for 2025, increased to 2.6 in 2026, maintained at 2.1 in 2027, and marked at 2.0 in 2028. The number of participants who saw upside risks to their inflation forecast fell to 12 out of 19 members.
- The committee’s growth forecast was upgraded to 1.6 in 2025, 1.8 in 2026, 1.9 in 2027, and marked at 1.8 in 2028. The number of participants who saw downside risks to growth stayed at 13 out of 19 members with one member shifting from broadly balanced risk to risk being weighted to the upside.
- The unemployment rate forecast was maintained at 4.5 in 2025, decreased to 4.4 in 2026, decreased to 4.3 in 2027, and marked at 4.2 in 2028. The number of participants who saw upside risks to their unemployment rate forecast rose to 15 out of 19 members.
- The median expectation for the path of the Fed Funds rate was revised lower.
- The median member now expects an additional 50 bps of cuts over the remaining two meetings in 2025. The committee maintained one rate cut in 2026 and one cut in 2027 ending at 3.125%, where it remains through 2028. In other words, the cumulative easing expected by the median participant over the forecast horizon is now at 100 bps following a 25 bps cut. The long run dot was unchanged at 3%.
Key Quotes from Chair’s Press Conference:
- Current and expected policy stance:
- "There was not widespread support at all for a 50 basis point cut today. We have done large rate hikes and rate cuts over the last five years. You tend to do those at a time when you feel like policy is out of place and needs to move quickly to a new place. That is not at all what I feel certainly now. I feel like our policy has been doing the right thing so far this year. We were right to wait and see how tariffs, inflation, and the labor market evolved. Now we are reacting to the much lower level of job creation and other evidence of softening in the labor market and saying, well, those risks are not fully balanced but moving in the direction of balance now and that warrants a change in policy."
- "You can think of this, in a way, as a risk management cut. You think of the SEP. The projections for growth this year and next picked up a little bit. Inflation and unemployment did not really move. What is different now? You see a different picture of risk to the labor market. We were looking at 150,000 jobs per month at the time of the last meeting. Now we see the revisions and new numbers. I do not want to put too much emphasis on payroll and jobs creation. It is one thing that suggests the labor market is cooling off. Of that, it tells you it is time to take that into account in our policy.”
- “Policy is not on a preset course. The Fed has been assigned two goals for monetary policy, maximum employment and stable prices. I remain committed to supporting maximum employment, bringing inflation sustainably to 2% and keeping long-term inflation expectations well anchored. Our success in delivering on these goals matters to all Americans. We understand our actions affect communities, families, and businesses across the country. Everything we do is in the service of our public mission. We at the Fed will do everything we can to achieve our maximum employment and price stability goals.”
- Inflation, Inflation Expectations, and the Impact from Tariffs:
- “I was saying what is happening in the labor market has more to do with immigration than tariffs. I would not say that all of what is happening in the labor market is due to tariffs. You have a slow down due to immigration and a slowing due to demand”
- “Our expectation, that you can see consistently through the year, has been inflation will move up this year, but basically because of the effects on goods prices from tariffs. But, those will turn out to be a onetime price increase as opposed to creating an inflationary process. That has been our forecast. Pretty much all the individual forecasts say that.”
- “we see inflation moving up, maybe not as high as we would have expected a few months ago. the pass-through of the tariffs into inflation has been slower and smaller. The labor market has softened. The case for there being persistent inflation is less.”
- Fiscal Policy, Growth Risks and Uncertainty:
- " We can say that over the course of this year, we have kept our policy at a restrictive level. People have different views. But a clearly restrictive level, I would say. We were able to do that, over the course of the year because the labor market was in very solid condition with strong job creation and all those things. If you go back to April and the revised job creation numbers for June, July, and August. I can no longer say that. That means the risks were clearly tilted towards inflation. I would say they are moving towards equality. Maybe they are not quite at equality. We don't have to know that. But they have moved meaningfully towards greater equality, the risk between the two goals. Data suggests we should be moving in the direction of neutral. That is what we did today."
- On Fed Independence
- “So there's 12 -- 19 participants, of whom 12 vote, as you know, on a rotating basis. So, no one voter can really, the only way for any voter to really move things around is to be incredibly persuasive and the only way to do that in the context in which we work is to make really strong arguments based on the data and ones understanding of the economy. Really that is all that matters and that is how it will always work. That is the way of the institution -- that is in the DNA of the institution and it won't change.”
Our View:
- The Fed has re-initiated its easing cycle against a backdrop of a weakening labor market and still elevated but nonthreatening inflation. Since the FOMC last met in July, two soft employment reports have increased perceived downside risks to the labor market. Consumer and business sentiment is mixed despite uncertainty surrounding tariffs having decreased and financial conditions having eased. The August PCE report is also expected to come in softer than anticipated, showing tariff passthrough that remains contained within specific Core Goods subcomponents. So far, the speed and magnitude of tariff passthrough to inflation has been more modest than what was anticipated. Looking forward, we believe that while tariff inflation will persist in subsequent data, we also expect the Fed to look through tariff related inflation and continue to focus on wage and services disinflation.
- Despite downside risks to the U.S. economy remaining elevated, we retain our base case of sub-trend growth. Real gross domestic product in the first half of the year has averaged 1.4%. Growth in the third quarter continues to track at a moderate pace. Business investment in sectors such as AI remain robust and personal consumption has slowed but not stalled to a concerning pace and remains healthy.
- We maintain our trading range for the ten-year U.S. Treasury (UST) yield at 3.75% - 4.50%. This yield range is supported by the Fed re-initiating its cutting cycle towards neutral, coupled with a weakening labor market, ongoing wage moderation, and continued service disinflation. Should we see layoffs pick up, we expect the ten-year U.S. Treasury yield to move into a lower trading range, prompting the Fed to consider larger rate cuts to a terminal rate below neutral. The balance of risks to growth and yields could shift to be more two-sided in 2026 if the Fed delivers expected rate cuts coupled with supportive fiscal policy that results in a re-acceleration in the economy.