In its recently concluded meeting, the US FOMC cut interest rates by 25 bps — the first rate change since December 2024. The FOMC statement reflected some notable shifts:
• Employment Mandate: The Fed struck a more dovish tone on labor market conditions. Recent data have shown signs of weakness compared with the strength observed up to the last FOMC meeting.
• Inflation: The language on inflation carried a cautious undertone, but the Fed appeared more focused on employment risks relative to inflation.
Since this was an SEP (Summary of Economic Projections) meeting, we also received updated forecasts. The key highlights:
• The median dot for 2025 stood at 3.6%, implying expectations of two additional cuts over the next two meetings this year, and one cut in 2026. Though the average tells a different story if compared to the median of dots.
• Core PCE projections for 2026 were revised upward, from 2.4% to 2.6%.
During the press conference, Chair Powell avoided strong forward guidance but emphasized labor market softness. He acknowledged that job gains have been running below the breakeven rate and stopped short of calling the labor market “solid.” On inflation, Powell noted that tariff-driven price increases are likely to persist next year as core goods inflation picks up. Importantly, he confirmed there was hardly any support for a larger 50 bps cut, apart from Miran, the Fed’s newest member.
Overall, the Fed remains in a meeting-to-meeting mode, highly data dependent. Looking ahead: The October FOMC (October 3rd) will be critical. Labor market data due that day could shape the Fed’s balance of risks, which has now clearly shifted from just inflation to a dual concern: employment and inflation, as “inflation faces upside risks while employment faces downside risks.”