Fed: What it decided and why it matters

Fed: What it decided and why it matters

25 bps rate cut — first easing since December 2024

The Federal Reserve cut rates by 25 bps, bringing the federal funds range down to 4.00–4.25%, marking the first easing since December 2024. There was only one dissent (Stephen Miran), who argued for a 50 bps cut. Powell clarified there was no broad support for a larger move and that “extra-large” cuts remain exceptional and tied to clear policy misalignment.

At the press conference, Powell reiterated the Fed’s dual mandate: a weakening labor market (new hires running below the “break-even” needed to stabilize unemployment) but inflation still needing attention. He also noted that the worst-case inflation scenarios are fading, and that the impact of tariffs increasingly looks like a “one-off price level shock”.

What Powell’s speech revealed about next moves

Three key messages:

1. “Normal” pace of cuts. The Fed wants to proceed gradually — avoiding both the risk of cutting too fast and reigniting inflation, and the risk of waiting too long and worsening labor market conditions. Powell made clear there was no push for a -50 bps cut, implying a bias toward further -25 bps moves if data allow.
2. Labor market drives the timing. With job creation below break-even, even “a small increase in layoffs” could push up unemployment quickly — making the Fed sensitive to any negative data surprises.
3. Inflation risks more balanced. Powell suggested that some risks have eased; external factors (tariffs) are seen more as level shocks than trend shifts. This allows for measured cuts, not a race to the bottom.

The new dot plot: what it really says

The September SEP clearly outlines the baseline trajectory:

• Median fed funds end-2025: 3.6% (from 3.9% in June). With the range now at 4.00–4.25%, this implies roughly 50 bps of further easing (two 25 bps cuts).
• Median 2026: 3.4%, 2027: 3.1%, 2028: 3.1%; long-run: 3.0%.
• The distribution of “dots” shows a very low outlier for end-2025, likely from new Governor Miran (consistent with his push for -50 bps and a more aggressive trajectory).

Key takeaway: the median is not a promise—but combined with Powell’s tone it anchors the market to a moderate path of cuts in 2025, followed by further gradual reductions in 2026–27.

Market reaction

• USD strengthened during the press conference
• Global equities rallied (new highs in some indices)
• US yields moved during and after Powell’s remarks, with the curve pricing in a cutting cycle but not a rapid one

Powell effectively defused expectations for aggressive cuts, keeping market pricing on an orderly path.

And the ECB?

The ECB last week left rates unchanged (deposit facility at 2.0%), described the euro area economy as “in a good place,” and lowered its medium-term inflation projections. Markets have scaled back bets on further 2026 cuts (now just under 50% probability).

Bottom line: Frankfurt is on pause, Washington is in gradual cutting mode.

Strategic implications for investors and businesses

Rates / Bonds. With the SEP at 3.6% by end-2025 and Powell sounding cautious, duration could benefit from an orderly cutting path, but yields may rebound on any hot inflation or labor surprises. A gradual curve steepening remains the base case.

FX. The dollar should hold firm as long as the ECB stays on hold and the Fed avoids signaling faster cuts. Pairs like EUR/USD stay sensitive to growth and guidance divergences.

Equities. The “yes to cuts, but with caution” message supports multiples without fueling liquidity-driven euphoria. Leadership stays with rate-sensitive sectors but selectively (quality tech, housing-linked, regulated utilities), while financials require active management as NIM compression offsets lower credit risk.

Credit. Spreads remain tight while the “softening but not hard landing” scenario holds. But Powell’s comments on employment risk are a warning: a faster labor deterioration could widen spreads before the Fed can accelerate cuts.

What to watch next

1. Labor data (payrolls, JOLTS, jobless claims): main trigger to calibrate the next 25 bps.
2. Core PCE: confirmation that disinflation continues without setbacks; watch the one-off tariff effects on price levels, not trends.
3. ECB communication: any eurozone slowdown or projection revisions could reopen the door to further 2026 cuts, affecting the US-EU rate spread.

In short

The Fed has started a gradual easing cycle. The dot plot (median 3.6% by end-2025) and Powell’s tone point to two more 25 bps cuts as the base case—unless data surprises. Markets reacted constructively but not euphorically. The ECB stays on pause for now: a moderate divergence that supports the USD and keeps expectations anchored for a slow 2025–26 normalization.