As widely anticipated, the Fed delivered a quarter-point rate cut coming out of its two-day policy meeting today, taking the central bank’s policy rate down to a range of 4–4.25%. The announcement ends an unusually long pause since its last cut in December 2024.
Notably, there was relative solidarity within the committee, with its newest member — Stephen Miran — being the sole dissenter, favoring a half-point cut instead.
The driving force behind the shift in tone is the moderation in employment conditions in recent months. Job openings have continued to stairstep lower over an extended period; that’s not new. What’s changed more recently is the sharp slowdown in the pace of job creation in recent months.
The weaker jobs picture has been further exacerbated by updated benchmark revisions released by the Bureau of Labor Statistics earlier this month that shaved over 900,000 off previously reported totals for the 12-month period ended last March.
Against a backdrop of lackluster job creation, the unemployment rate would typically be edging higher, but a reduced flow of workers into the labor force has helped to keep the jobless rate relatively rangebound despite lackluster hiring. The fact that employers haven’t moved en masse to start trimming payrolls has also been critical to the delicate balance that has kept a lid on the unemployment rate.
Initial jobless claims merit close monitoring, particularly on the heels of last week’s surprising spike in first-time filers. Whether that report was a one-off anomaly or evidence of a sustained increase in the pace of claims remains to be seen.
While today’s cut was widely expected, the Fed’s willingness to look past persistent inflation that remains well above the central bank’s 2% target highlights the emerging risk the policymakers see in the labor market.
In his press conference, Fed Chair Powell referred to the decision as a “risk management cut,” acknowledging the cooling that’s underway in the jobs market and the perceived need within the Fed to trim in an attempt to stave off a more pronounced loss of momentum.
Beyond today’s cut, the FOMC’s updated projections call for another two cuts before year-end, which represents a quarter-point of additional easing than was baked into its June projections. More telling is that it was accompanied by upward revisions to growth and inflation for 2026.
For the time being, policymakers appear willing to live with higher inflation to increasingly focus on providing support for growth and labor conditions. That appears to hinge on their belief that tariffs represent a one-time increase in prices rather than a source of sustained inflation pressure that would be a greater cause for concern.
Questions will undoubtedly continue to be raised about the degree to which Fed policy is being influenced by political pressure, particularly as its newest member stakes out a position that calls for more aggressive cuts in the near term. If today’s developments are any indication, both the relative agreement on an incremental rate cut and updated projections suggest that policymakers aren’t bending to calls for more aggressive easing.
Conversely, the fact that the Fed has struggled to rein in inflation over the past few years and its decision to cut now while inflation remains well above 2% signals the challenge before policymakers and the conflict in the two aspects of its dual mandate in the current environment. Cut too aggressively and inflation risk could increase; wait too long and labor conditions could soften further, contributing to a self-fulfilling slowdown and increasing layoffs.
That makes the safe path ahead for the Fed increasingly narrow, with risks on either side, even in the absence of political pressure. For now, boosting labor conditions is taking center stage. The path back to 2% inflation continues to lengthen, and the Fed’s dovish announcement today sends a clear message that they’re willing to live with moderately elevated inflation in the near term.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.
