September FOMC recap—labor market jitters Trump inflation

For the first time since December 2024, the Federal Open Market Committee (FOMC) lowered its policy rate by 25 basis points (bps), setting the target range for the fed funds rate at 4.00% to 4.25%. The move itself was hardly surprising, but a recent string of significantly weaker labor market data alongside mounting political pressure advocating for a more sizeable move made the communication particularly relevant for a market already pricing in a series of additional rate reductions.

In the prepared statement, the committee dropped its previous characterization of the labor market as “solid” and replaced it with a judgment that “downside risks to employment have risen.” Inflation was characterized as having “moved up,” but the clear takeaway was that a rapidly weakening labor market had caused a meaningful shift in the balance of risks, causing the Federal Reserve (Fed) to re-engage with rate cuts. Despite predictions for as many as three dovish dissents from Fed governors, it was only the newly appointed Stephen Miran who dissented in favor of a larger 50-bp cut. Powell later went on to say that the committee did not seriously consider a 50-bp cut.

In the Summary of Economic Projections (SEP), the median committee member now anticipates a total of 75 bps of cuts in 2025 (including today’s move). This compares to a total of 50 bps projected in the June SEP. Notably, seven of the 19 members now foresee no further rate reductions this year, indicating a stark bifurcation within the committee. The median forecasts for both 2026 and 2027 were each revised downward by 0.25%. Modest upgrades were made to gross domestic product (GDP) growth expectations and despite the heavy focus on labor market weakness, projections for the unemployment rate remained unchanged for 2025 and were revised lower for 2026 and 2027.

At the post-meeting press conference, Fed Chair Jerome Powell spent the bulk of the time fielding questions on his assessment of the balance of risks, which in his words has been “moving toward equality.” Though inflation remains above the Fed’s 2% target, we believe that weaker job gains, especially after a series of downward revisions, have shifted the balance of risks meaningfully in favor of focusing on the employment side of the Fed’s dual mandate. Historically, job creation at the recent pace has often preceded periods of much slower growth. For that reason, we remain highly attentive to any further deterioration but are unconvinced that a near-term recessionary outcome is likely. Sentiment surveys and other measures of uncertainty have consistently reflected increased concern in the wake of continually evolving trade policy. Our view has been that this would translate into a delayed or cautious approach to business hiring plans, capital expenditure and consumer spending.

More recently, however, trade policy has become less volatile, providing businesses and consumers with greater clarity about the environment moving forward. While tariffs have lifted goods prices, the overall impact has been spread out over time and is likely to be less than initially feared. Financial conditions remain easy and are poised to become easier with lower policy rates. The positive impacts of the fiscal bill passed in July have likely not yet been felt and could spur growth and broad-based capital investment as soon as early 2026. While we recognize that lower-income households now appear more stretched after both recent inflation and slower job gains, aggregate consumer spending has shown signs of recovery since the second quarter. Household balance sheets in aggregate remain healthy after a long period of consumer deleveraging. Housing activity has been sluggish, but that too could be given a fillip in the near term by mortgage rates that are now at the lowest levels since early 2023.

Cutting today in support of a weakening labor market is not controversial given our and the Fed’s shared view that policy rates are still a ways from neutral. But as additional cuts are realized over the next one to two quarters, the committee will need to reassess the balance of risks in the context of a policy stance that is closer to neutral. Combining this fact with the possible stabilizing forces mentioned earlier makes it unlikely that the Fed will execute an uninterrupted series of rate cuts below 3.00% as currently priced by the market. While that will take some time to play out, we believe that in the interim, US fixed-income will continue to outperform cash and that the incremental yield available on high quality corporate and structured product securities will look attractive.