The Federal Reserve (Fed) cut rates 0.25%-points at their September meeting, taking their policy rate to the 4.0–4.25% range. This comes after a long nine-month pause but the move was widely expected, especially given recent data showing a rapidly cooling labor market. While investors did not expect an extra-large 0.5%-point cut, it was notable that Fed Chair Powell was quite dismissive of the possibility, saying there was no widespread support for anything more than a 0.25%-point cut. This in a nutshell captured the dynamics of how the Fed is thinking about this rate cut.
The Fed has two mandates—maximum employment and stable inflation—and things are going south on both sides. Payroll growth data are flashing a big red warning sign. At the same time, inflation is rising and running closer to 3%, well above the Fed’s target of 2%. So, there are risks to both sides of their mandate and the big question was, which one would they be more focused on?
Powell called the cut a “risk-management” move, and given they chose to cut rates, they’re clearly prioritizing the risk to the labor market over inflation. In other words, the Fed is more worried about the labor market deteriorating more rapidly than inflation spiraling out of control. In fact, they believe inflation risk has eased since early summer. Current elevated inflation numbers are due to tariffs but that will be “transitory”.
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