Walking a Tightrope
On September 17, 2025, amid a mix of economic signals and political pressure, the Federal Reserve cut its benchmark federal funds rate by 25 basis points, bringing the target range to 4.00%–4.25%. There was one dissent on the vote: Stephen I. Miran favored a more aggressive 50 basis point cut instead of 25. Mr. Miran was recently appointed by President Trump to fill the remainder of Adriana Kugler’s term on the Federal Reserve Board of Governors.
This was the first interest-rate cut since December 2024 and signals a shift in focus from price/inflation control to concerns over a weakening labor market. In addition to the rate cut, the Fed released updated forecasts (“dot plot”) suggesting there will likely be two more quarter-point rate cuts later in the year. Fed Chair Powell described the decision as a “risk-management” cut suggesting that the near-term risks of a deteriorating labor market now outweigh the risk of accelerating inflation.
Inflation Pressure
- Inflation remains elevated relative to the Fed’s longer-run goal of 2% with CPI running at 2.9% as of the August data release.
- In particular, consumer price increases have picked up in certain areas as housing and food costs have proven to be rather “sticky.”
- The Fed’s projections expect inflation to remain above target heading into 2026—indicating that disinflation is proceeding slowly.
Labor Market & Growth
- Growth has moderated. Economic activity in the first half of the year slowed from earlier stronger momentum.
- Labor market shows signs of softening: job gains have slowed, unemployment has edged up though it remains relatively low.
- Revisions to earlier employment data have weakened the apparent strength of the labor market—past job creation figures were revised down substantially by 911,000 over the prior 12 months.
- This softening of labor conditions increases downside risk to employment. In other words, the Fed is concerned that if the labor market deteriorates further, that could feed back into broader economic weakness.
The Fed has a dual mandate to maximize employment and stabilize prices (which they define as inflation around 2%). Mr. Powell and the Fed, will be walking a tightrope over the next several months as they try to balance conflicting economic signals. As always, Powell emphasized that any future rate cuts will be data dependent. Market participants will be watching the labor and inflation data closely over the coming months for indications of any future change in rates.
Let us all hope that Mr. Powell and the Fed stay aloft and keep the employment market stable without accelerating inflation pressure!
