At its September FOMC meeting, the Federal Reserve cut interest rates by 25 basis points, bringing the target range down to 4.25%, right in line with market expectations. Fed Chair Jerome Powell called this move a “risk-management cut.” With the job market cooling and new job creation dropping, the risks of a weaker labor market now outweigh the risk of inflation re-accelerating. The vote was 11-1, with the lone dissent coming from newly appointed Governor Stephen Miran – a Trump ally – who argued for a 50-basis-point cut, in line with the White House’s wishes.
But the latest dot plot shows that Fed officials are far from unified on the path ahead. At the same time, the Fed raised its GDP growth outlook, signaling that the economy’s resilience is the foundation for a gradual, measured rate-cutting cycle – not a series of aggressive slashes.
A Balancing Act in a Two-Sided Risk Environment
According to the Fed’s latest Summary of Economic Projections (SEP), policymakers now expect the core PCE price index – their most closely watched inflation measure – to rise 3.1% this year and still sit at 2.6% in 2026. That’s noticeably higher than when they kicked off the rate-cut cycle in 2024.
Fifteen of the 19 FOMC participants said the risks to unemployment are tilted to the upside, and 12 said the same about core inflation. This highlights a key split inside the Fed: today’s rate cut reflects their judgment that both sides of the Fed’s “dual mandate” (price stability and maximum employment) are under pressure – but right now, the employment risk is taking priority.
Source: Summary of Economic Projections, Federal Reserve Board
Powell stressed that this cut was about “risk management,” a signal of how tough it is to balance easing with caution. As he put it: “There is no risk-free path.” The Fed’s focus has shifted toward the weakening job market. Powell has previously warned that tighter immigration policies could slow labor force growth and put further drag on job creation.
Since the July FOMC meeting, the employment picture has changed dramatically. Revised data show that average monthly job gains through June were cut to 96,000 (from 150,000 previously reported), and for the three months through August, that number sank further to just 29,000. August’s unemployment rate ticked up to 4.3%, breaking out of its year-long 4.0–4.2% range.
Inflation, meanwhile, has been creeping back up. Core PCE climbed from a four-year low of 2.6% in April to 2.9% in July – slightly above the 2.7% level a year ago, when the Fed kicked off this cycle with a hefty 50-basis-point cut. This shows the economy is going through a major transition. Trump’s new tariff measures are putting upward pressure on prices, adding fresh risks of an inflation rebound. These tariffs are raising costs for manufacturers and small businesses, and as supply chains and pricing adjust, more of these costs are getting passed through to consumers.
The Dot Plot Reveals Deep Divisions
This meeting’s dot plot shows just how split Fed officials are about the future. The median projection points to two more cuts this year. But the distribution tells the real story:
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9 officials expect two more cuts this year
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2 expect one more
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6 expect no further cuts
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One official (likely Miran) projects a total of 150 bps of cuts this year, while another thinks there should be no cuts at all.
Looking further ahead, the median Fed funds rate forecast falls to 3.6% for end-2025, 3.4% for 2026, and 3.1% for 2027. But the individual forecasts are widely scattered, showing just how uncertain the outlook is.
Source: Summary of Economic Projections, Federal Reserve Board
Some policymakers are focused on the fact that inflation has been running above target for more than four years and worry that businesses and consumers may be getting used to rising prices, making inflation stickier. Others are worried that the full lagged effects of the massive 2022-2023 rate hikes are still working through the economy, possibly hitting the labor market harder than expected – especially with housing already showing weakness.
Fed Independence Under Political Pressure
This decision comes as the Fed faces intense political pressure. Trump has spent months hammering Powell for being too slow to cut rates, even going so far as to try to remove Fed Governor Lisa Cook over alleged mortgage policy violations – an unprecedented move.
Reporters grilled Powell about Fed independence in the press conference, with the first question not even about the economy but about politics – another first. The Fed clearly knows the market is watching its independence closely.
Powell pushed back strongly, insisting that politics had no role in the decision. The near-unanimous vote (with only Miran dissenting in favor of a bigger cut) reassured markets that the Fed is still making decisions on its own terms.
Economic Outlook
The Fed significantly raised its GDP forecasts: 2025: 1.6%; 2026: 1.8%; 2027: 1.9%; 2028: 1.8%.
This upgrade shows they believe the economy is fundamentally resilient – another reason they feel comfortable taking a slow, steady approach to cuts.
Futures markets are currently pricing in about 45 bps more cuts this year, plus another 72 bps next year. The chance of no move at the October meeting sits at just 13%.
Source: Summary of Economic Projections, Federal Reserve Board
Powell didn’t lay out a clear path for future cuts, but based on his comments, if the job market bounces back and inflation stays sticky, the Fed will likely pause the cutting cycle.
Invesight Viewpoint
Going forward, the Fed will keep walking a tightrope between inflation risk and employment risk. Powell made it clear that each decision will be made “meeting by meeting” and will be data-dependent. He emphasized: “Downside risks to the labor market were front and center in today’s decision.”
Tariffs will be a key swing factor. Powell said the baseline assumption is that their impact on inflation will be temporary, adding just 0.3–0.4 percentage points to core PCE. But if the effect lasts longer than expected, it could limit how much further the Fed can cut.
As Powell summed it up, the Fed’s job right now is “finding the balance between easing and caution” – not just a technical adjustment, but a deep judgment call about the future of the economy.
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