The US Federal Reserve delivers a “risk management” interest rate cut

Overview

• The FOMC cut rates by 25bp to 4.00–4.25%, as widely expected, resuming easing after five consecutive meetings on hold since March.
• New Fed Governor Stephen Miran dissented in favour of a 50bp cut in his first meeting. While his dovish stance was anticipated, it was notable he did not sway Waller and Bowman (who dissented in July). This underscores Powell’s firm control of the FOMC narrative despite political pressure. Powell noted that a single vote only matters if backed by an exceptionally persuasive case—implying Miran’s was not.
• The FOMC statement turned decisively dovish with key changes: “downside risks to employment have risen” was added, the labour market description was downgraded (scrapping “solid”), whilst inflation was acknowledged to have “moved up” while remaining “somewhat elevated.” This is seen as a clear sign of the Fed placing greater weight on labour market risks, as stagflation remains lurking in the background.
• The statement of economic projections (SEP) was mildly hawkish, with lower unemployment estimates for 2026–27 and higher core PCE. Combined with a dot plot pointing to one extra cut versus June, this reflects a more dovish reaction function overall.
• In his press conference, Powell characterised the cut as “risk management” and a move to a “more neutral” position that will “presumably” be helpful to the labour market. He pushed back against market pricing with “I’m not blessing what the market is doing”, referring to the expected rate path.
• On political pressure, Powell pushed back firmly but politely, by:
  • Stating there was “not widespread support at all” for a 50bp cut
  • Declining to respond to Bessent, saying he won’t comment on “anything the secretary says”
  • Staying silent on his plans beyond May
  • Refusing to comment on the Lisa Cook matter
  • Emphasising that Fed decisions are driven solely by data and economic analysis

Market reaction

Markets responded mildly hawkishly: equities edged lower, bond yields rose slightly, the dollar strengthened, and commodities weakened. A brief post-decision rally reversed during Powell’s press conference, which was dovish but not as much as markets had hoped. The S&P 500 mostly recovered by the close.

Betashares Fixed Income desk comments

• The wider dispersion in the dot plot suggests greater uncertainty around the future path of policy, which combined with the potential for Miran gathering more allies once Powell’s term ends, elevates the potential for volatility in bond yields. The September SEP pushed inflation’s return to target out to 2028 (seven years above 2%), while paradoxically lowering unemployment forecasts—signalling internal uncertainty about policy transmission in this unusual environment. With Miran established as the dovish outlier and Powell’s term ending in May, succession dynamics will increasingly shape expectations for 2026 policy. For now, Powell retains control of a Fed that is data-dependent, leaning toward gradual easing but resisting political or market-driven pressure for aggressive cuts.
• The base case is continued curve steepening: a Fed more focused on labour market risks keeps the front end anchored, while uncertainty sustains attractive term premiums at the long end.
• Concerns over Fed independence have eased somewhat post-meeting, at least through Powell’s term. Behaviour of treasury yields over the past few months also reaffirm their safe-haven role.
• The desk continues to view mid-to-long maturity term premiums as attractive, offering fair compensation for current uncertainty.

Fed dot plot

FOMC members remain split on 2025 projections: nine favour one cut or less, ten favour two or more—the swing factor being Miran, the lone outlier at 2.875%.

Source: Bloomberg

Fed summary of economic projections (link to full summary https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20250917.pdf)

Source: US Federal Reserve

Bloomberg intelligence NLP model

According to the model, Powell’s opening statement showed a clear dovish bias, and was in fact more dovish than last year when the Fed cut by 50 bps. However, the market had strong dovish expectations going in, and the Fed still slightly fell short of expectations.

Source: Bloomberg

Long run history of Fed funds rate vs US 2- and 10-year government bond yields

Source: Bloomberg