The Fed’s insurance cut: A soft landing with job-risk crosswinds

Insurance cuts and soft landing daydreams

The Fed’s 25bp trim wasn’t just a tweak; it was Powell’s version of a “risk-management cut” — the smallest blade he could draw without pretending nothing was wrong. Call it a surgeon’s nick rather than a lumberjack’s swing. Small enough to signal calm, deliberate steering of the ship, but sharp enough to show the Fed’s compass has tilted: inflation is no longer the primary enemy, jobs are.

That pivot matters. When the captain stops scanning the horizon for inflation squalls and instead watches the crew below deck struggling to keep pace, it tells the market everything. We’re no longer just fighting price pressures; we’re fighting for labour stability.

The vote was 11–1, a minor footnote given the heavy pre-meeting speculation about a fractured committee. Markets had mostly priced this base-case 2025 dot plot outcome, but not the less dovish 2026 view, which is why the knee-jerk reaction was less a rally than a round of profit-taking. A Dow that kissed new highs ended up 259 points firmer, the S&P drifted flat, and the Nasdaq sagged 0.5%. The only real winner was small caps — the Russell 2000 picked up ground, which is logical given their reliance on variable funding costs.

Powell’s press conference was the real show. His characterization of the cut as “insurance” makes clear the Fed isn’t panicking. Still, the dropping of “solid” from the job’s language and the acknowledgement of downside risks to employment tell us exactly where the balance of risks has shifted. This isn’t a prelude to an unchecked easing cycle; the dots point to two more cuts this year, four in total through 2026. That’s a measured path, slower than what futures curves are already writing into the script. The Fed thinks three more cuts are sufficient to revive hiring and support growth. The market says that’s wishful thinking, and has pencilled in an extra 2–3 cuts that would push Fed funds toward 3% by late 2026.

The difference between those two paths will define just how fast the dollar weakens in the months ahead. Structurally, the Fed shifting its mandate toward jobs is dollar-negative, but tactically, the trade is already stretched. Positioning went into this meeting leaning for an uber-dove, and with the Fed delivering more of a measured insurance cut than a full-blown easing pivot, the market finds itself a touch over its skis. That means short-dollar bets may be forced to take a breather, limiting downside until the next decisive print. In other words, the greenback bears are now handcuffed to NFP — and every tick in job creation will be the referee’s whistle for how fast the dollar drifts lower again.

What the Fed is trying to sell is that taking timely action today means less to do tomorrow. But traders aren’t buying that simple a story entirely. They see labour markets bleeding lower, corporate hiring softening. The Fed can’t afford to whiff on this one if unemployment starts creeping higher.

In bonds, the 10-year flirted with a decisive break below 4% before Powell’s talk nudged yields back up. The curve steepened, but only mildly, as the back end followed the front lower before retracing. It was a classic two-way rates market: the structural bias is for lower yields, but any whiff of renewed inflation chatter keeps the long end reluctant. Liquidity mechanics were left untouched — Treasury and MBS roll-offs remain capped, repo noise dismissed as quarter-end positioning rather than systemic strain.

For the dollar, it was a trader’s session: initial knee-jerk lower, only to snap back as yields reversed. Structurally, though, a Fed now openly re-weighting its dual mandate toward employment is not dollar-positive. Positioning may have blunted the immediate move, but as the dust settles, the dollar should drift back toward the lows of the year, hyper-sensitive now to every tick in NFP and unemployment. For risk assets, this isn’t a disaster scenario. Rates are moving from restrictive toward neutral in an economy still growing north of 3%, with inflation already gliding lower absent the 2022 oil-rent-wage cocktail. That sets up a benign backdrop into year-end — provided, of course, job creation doesn’t stall outright, which is now the ultimate proof is in the pudding trade. The Fed has fired its insurance shot; the next verdict rests with the labour market.

Policy rates are still running a whole percentage point or more above neutral, and the labour market is fraying at the edges with no quick fix in sight. That tells me one thing: the Fed’s own dot plot isn’t just decoration on a PowerPoint slide — it’s the closest thing to a road map we’ve got for the rest of the year.

Think of it like a convoy running too hot on the highway. The engine is still revving well above cruising speed, but the tires are already wobbling. Unless the driver eases back, something gives. That’s why the dots matter — not because they’re gospel, but because they sketch the lane markers Powell & Co. will try to stay inside.

Markets may want to dream up alternate routes — pricing in more aggressive cuts, or betting Powell will blink early. But with policy still north of neutral and the jobs picture deteriorating into year-end, the Fed doesn’t have the luxury of freelancing. They’ll hug the dotted line until the market or the economy forces a detour.

Opinion: The nightmare before christmas playbook

“There are no risk-free paths now. It’s not incredibly obvious what to do,” Powell said.

Forget the headlines — today’s cut is the opening act of the Fed’s “ The Nightmare Before Christmas” playbook. Markets cheered the idea of “less dissent” on the board, but that’s the wrong read. What we really saw, if you squint enough, was a table littered with contradictory outlooks, each policymaker pulling in a different direction. And looming over it all: Trump’s new ringer, banging for much deeper cuts than anyone else at the table. That’s not diversity of thought, that’s a crack in the facade of independence.

The danger is that at the end of the day, traders don’t interpret this as a healthy debate — it sees disarray, the cockpit crew arguing over the yoke mid-flight. Once that perception sets in, confidence fractures. And when confidence breaks, inflation expectations become unanchored. That’s the genie moment. Once it slips out of the bottle, there’s no stuffing it back in without a brutal fight — and usually with collateral damage all over Main Street.

For traders, this is the kind of shift that warps the playing field. As a Trader, I’ve spent the last 2 months bracing for it — positioning for a world where the Fed’s credibility becomes the most volatile asset class of them all. But for everyday Americans? The fallout lands squarely in their lap: higher prices, shrinking purchasing power, and the creeping realization that the institution meant to guard stability has become the source of instability