Fed cuts rates and signals more to come in 2025
Risks to the labor market point to easier monetary policy ahead.
The Federal Reserve lowered the federal-funds rate on Wednesday by 0.25 percentage points, setting a new target range of 4.00%-4.25%. A cut had been widely expected since the jobs report issued at the beginning of August, which showed a sharp deterioration in job growth.
The central bank’s official press release noted that the committee “judges that downside risks to employment have risen,” and said they decided to cut “in light of the shift in the balance of risks.”
The market had baked in a small probability of a half-point cut, but 11 of the 12 FOMC members voted for just a quarter-point cut. The lone voter for a half-point cut was Stephen Miran. Miran was confirmed to the Board of Governors (all of whom sit on the FOMC) this week, after having served as chair of the Council of Economic Advisers in the Trump administration.
Miran is almost certainly the unnamed participant in the Fed “dot plot” who assesses that the appropriate federal-funds rate for the end of 2025 would be 2.75%-3.00%, which would constitute another 1.25 points in cuts over the next three meetings. Miran’s advocacy for much looser monetary policy is in line with President Trump’s desires.
However, based on the dots, Miran isn’t quite endorsing Trump’s stated goal of a 1.25%-1.50% rate range (a 3-point reduction from the rate going into today’s meeting). The lowest projection in the dot plot (which, again, is probably Miran) calls for a 2.25%-2.50% range at the end of 2027.
It’s also possible that Miran becomes more independent if he is reappointed to the Board of Governors after his current term (which he took over from Adriana Kugler, who resigned) ends in January 2026. That would give him a fresh 14-year term. Board members have these lengthy terms to help insulate the Fed from short-term political pressures.
In his remarks today, Fed Chair Jerome Powell affirmed that independence is “deeply in [the Federal Reserve’s] culture” and can’t be overturned overnight.
More rate cuts ahead
The broader set of FOMC projections shows that the median participant expects the rate to hit 3.50%-3.75% by the end of 2025, in line with current market expectations. The rate is expected to drop further to 3.25%-3.50% by the end of 2026. This would mark only one 0.25-point cut in 2026, while as of yesterday, the market was expecting 0.75 points in cuts that year. Morningstar is in between, expecting a range of 3.00%-3.25% at the end of 2026.
The FOMC projections call for core inflation to stand at 2.6% year over year at the end of 2026, while we expect it to be somewhat higher at 3.2%, owing to tariffs. On the other hand, we expect labor market conditions and economic activity to be noticeably weaker. The FOMC projects unemployment at 4.4% in the fourth quarter of 2026, while we expect 4.7%. Likewise, they expect GDP growth at 1.6% year over year in the fourth quarter of 2026, while we expect 1.3%.
Given the prevailing expectation that the inflationary hit from tariffs will be more of a one-off shock (and that it should eventually be counterbalanced by increasing economic slack), the risks to the labor market call for looser monetary policy in both our and the Fed’s assessments.
While Powell noted that the rise in the unemployment rate has been very mild (averaging 4.2% in the past three months, vs. 4.1% as of the first quarter of 2025), he painted a picture of a labor market in a state of precarious balance. Both labor supply and demand have fallen, keeping unemployment from changing much. But if demand continues contracting, the economy risks toppling into a vicious cycle of layoffs and contraction of spending.
