Stephen Miller
As expected, The Federal Reserve’s FOMC lowered the policy rate by 25bps to a target range of 4-4¼ per cent.
The decision clearly reflected greater emphasis on the labour market side of the Fed mandate with Fed Chair Powell describing the labour market as “no longer solid”.
However, Powell stated that “it was not obvious” what the Fed should do next, implying that sticky inflation, and its potential impact on inflation expectations, are still weighing on the minds of a number of Fed participants. Fed Chair Powell reinforced this by noting that the Fed’s “obligation is to ensure that a one-time increase in the price level [from tariffs] does not become an ongoing inflation problem”, although he also noted that the Fed is in a “meeting-by-meeting situation.”
Those ongoing concerns around sticky inflation meant a 50bp cut was a ‘bridge too far’ for FOMC members, with only recent Trump appointee Stephen Miran voting for a larger 50bp cut (quite a modest amount compared with recent urgings from his former boss).
The ongoing caution with respect to cutting the policy rate was evident in the newly issued economic projections.
The median “dot plot” implies two more 25 bp policy rate reductions this year and a further reduction next year (that is another three interest rate cuts, on top of today’s move, to end 2026 from the previous two envisaged in June).
The updated projections continue to show ongoing tepid growth projections (but with limited labour market fallout) combined with somewhat sticky – but declining – inflation.
The Fed maintained its inflation forecast (core private consumption expenditures (PCE) price index) at 3.1 per cent for 2025 and increased its 2026 projection to 2.6 per cent from 2.4 per cent. The unemployment rate projection for 2025 was unchanged at 4.5 per cent and for 2026 was actually revised down to 4.4 per cent from 4.5 per cent which would seem to indicate that while the labour market might “no longer be solid” it is not, in the Fed’s view, weakening sharply. GDP growth was revised up to 1.6 per cent in 2025 and 1.8 per cent in 2026 from 1.4 per cent and 1.6 per cent respectively.
The relatively modest adjustments to the projections, and their character (slightly higher inflation and slightly better unemployment) explain why the bulk of the FOMC thought a more modest 25 bp adjustment was appropriate.
In that context it may be that the FOMC members see some fiscal impetus and maybe ongoing “wealth effects” from equity market buoyancy supporting GDP growth and the labour market in 2026 (but that is conjecture on my part).
Markets responded to the relatively cautious approach signalled by the Fed by paring back (if only a little) some of its recent exuberance; bond yields rose; stocks declined; the USD was a little firmer while gold was a little softer.
More interesting will be how the Fed’s FOMC takes shape in 2026 as the President Trump seeks to assert his control over the Fed’s decision-making body. Recent talk of a third element to the Fed’s mandate of “modest long-term interest rates” risks saddling monetary policy with a set of potentially irreconcilable objectives.
A politically pliant Fed with a such trilateral mandate might find the implied “financial repression” (keeping the entire yield curve below a level that it otherwise would be) means that the inflation side of the mandate is vulnerable. That would have potentially tumultuous macro implications for financial markets.
Still, how that unfolds is all ahead of us.
The only certainty is more uncertainty.
By Stephen Miller, investment strategist
