September FOMC: A “risk management” cut

Summary

• As expected, the FOMC reduced the fed funds target range by 25 bps to 4.00%-4.25% at the conclusion of its meeting today, the first adjustment in nine months. Newly confirmed Governor Stephan Miran was the lone dissenter at the meeting, preferring to cut by 50 bps instead of 25 bps.

• The decision to ease reflected a "shift in the balance of risks" with the Committee believing that the "downside risks to employment have risen." While inflation has ticked up since the spring, a development acknowledged in the post-meeting statement, job growth has downshifted sharply and the unemployment rate has risen to the top end of the Committee's central tendency range consistent with full employment.

• Amid increased concerns about the jobs market, the median projection for the fed funds rate at the end of the year edged down by 25 bps to 3.625% relative to the previous projection from June, indicating an additional 50 bps of easing over the course of the FOMC's October and December meetings. The median projection for 2026 dipped to 3.375%, implying just 25 bps of cuts next year remains the base case after a bit more easing this year. The median estimate for the longer-run, "neutral" fed funds rate was unchanged at 3.0%.

• Yet, Chair Powell in the post-meeting press conference struck a mildly hawkish tone in our view and continued to signal that the Committee remains in no rush to return to neutral. Rather, with policy still somewhat restrictive, Chair Powell characterized today's adjustment as a "risk management cut" and the near-term monetary policy outlook as a "meeting-by-meeting situation."

• Overall, the outcome of today's meeting strikes us as a balanced response to the labor market's loss of momentum and still elevated pace of inflation. With the Fed's dual mandate in tension, what will the central bank do? We think the FOMC will put more weight on employment and cut the federal funds rate by 25 bps at each of its next two meetings, pushing the target range down to 3.50%-3.75% by year-end. We project two more 25 bps rate cuts at the March and June meetings next year followed by a long hold, resulting in a terminal fed funds rate of 3.00%-3.25%.

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