The decision to cut rates by a quarter point (to approximately 4.10%) was nearly unanimous. One dissent came from new Fed Governor Miran, who pushed for a larger reduction. Fed Chair Powell’s ability to rally the divided committee to a near unanimous vote was a victory for Fed independence. His description of the action as a “risk management cut” implies a prudent Fed not in panic mode. The action highlighted two recent developments or perceptions regarding the “dual mandate” (inflation and employment). First, the feared tariff “pass-through” effects on prices have been muted. “To the consumer, the pass-through has been pretty small,” Powell said. “It’s been … slower…than we thought.” He also indicated that this has now tipped the “balance of risks” towards the jobs market. “The labor market is softening, and we don’t need it to soften anymore, and don’t want it to,” he said definitively. Jobs growth has slipped below “breakeven,” as employers are holding on to workers but people are struggling to find jobs.

What’s Next? The Supreme Court will weigh in on Fed independence as it hears a motion to remove Fed Governor Lisa Cook. A more divisive Fed? The “dot plot” (see below) indicates that a majority favors two more rate cuts by year-end. However, it is a thin majority, with about 40% dissenting and calling for no cuts by year-end. It seems some “hawks” at the Fed are not ready to abandon the inflation fight, while price increases are up to about 3%. Today, the 10-year Treasury jumped from 4.00% to 4.10%, as the weekly jobless claims came in lower than expected, possibly indicating a stronger jobs market than previously thought. Also, the rate cut bets had been baked in, with some unwinding occurring after the small cut. The future path is not clear and, hopefully, data dependent. Stay tuned…

By David R. Pascale, Jr., Senior Director