September FOMC meeting: Fed is taking the no-risk free path to cuts

As widely expected, at its September meeting the Federal Open Market Committee (FOMC) decided to lower its benchmark policy rate by 25 basis points to 4.00%-4.25%. Only one official voted to dissent, preferring a larger 50 basis point cut.

Today’s decision was characterized as a “risk management cut,” an acknowledgement of the labor market risks but also the elevated uncertainty around inflation and government policy. Although this is likely to be the first of a sequence of cuts, Chair Powell’s comments indicated it would likely be a fairly shallow easing cycle with rates only gradually moving towards neutral.

Current assessment

Labor and inflation: Fed Chair Jerome Powell emphasized that, in recent months, the full employment side of their mandate has become more concerning than the inflation side. Indeed, signs of labor demand weakness have become more apparent across the data, while the impact of tariff-induced price increases on inflation appears to be more modest than originally expected. Yet, Chair Powell also emphasized that inflation concerns were still pertinent and will deserve attention over the coming months.

Structural shifts: At the same time, labor dynamics have been shifting. As Powell noted, decelerating immigration has driven a drop in labor supply, pushing down the breakeven rate of employment growth and putting the labor market in a “curious” balance. The end picture is one of only a modestly weaker jobs market, even as monthly payroll growth has dropped meaningfully.

Fed independence: President Donald Trump’s latest Fed appointee and close ally, Stephen Miran, was among those voting in today’s decision and the lone dissenter. As expected, Powell declined to entertain speculation around the politicization of the Fed, instead just emphasizing its independence and continued focus on the dual mandate.

Updates to the Summary of Economic Projections

The new Summary of Economic Projections was also released today. It showed the Fed’s focus on the employment side of its dual mandate, with the median projection showing another two 25bps rate cuts this year, albeit in a very narrow margin.

• The GDP growth forecast was revised up from 1.4% to 1.6% for 2025, from 1.6% to 1.8% for 2026, and from 1.8% to 1.9% for 2027. The upward revisions likely speak to the gentle recovery expected by the Fed, which is also reflected in consensus forecasts.
• The unemployment rate forecast was left unchanged at 4.5% in 2025, but is expected to dip to 4.4% in 2026 and 4.3% in 2027. This unusual dynamic of cutting rates into declining unemployment likely reflects the Fed’s view that structural factors are leading to a shrinking of labor supply, offsetting some of the labor demand weakness.
• The headline PCE inflation forecast for 2025 and 2027 was left unchanged at 3.0% and 2.1% respectively, while 2026 was revised up from 2.4% to 2.6%. The upward revision just for 2026 indicates that the FOMC still expects tariffs to have only a one-time price increase effect, though risks remain particularly heightened given how difficult it is to forecast the impact of the tariffs.
• Our own economic forecasts are not dissimilar to the SEP projections, although we expect the unemployment rate to stabilize around 4.5% rather than dip back down.

The Fed’s dot plot was slightly more dovish than in June, with 75bps of cuts in 2025 in total rather than 50bps—the implication being that there will be two more cuts this year. However, it’s worth noting that just 10 of the 19 FOMC members had a projection of two or more cuts this year.

The 2026 median dot sees just one cut in 2026 (compared to market pricing for three cuts) and one more cut in 2027 which would take policy rates down to a terminal rate of 3.00%-3.25%. Yet, the picture of a very divided FOMC was further reinforced by the very wide dispersion of 2026 dots, ranging from 2.5% (equivalent to a further six cuts from here) to 4% (equivalent to no further cuts).