– Powell: Increased Downside Labor Risks Motivated FOMC to ‘Move Toward Neutral’
– SEP Projects 3.6% Funds Rate End ‘25; 3.4% End ‘26; 3.1% End ‘27
By Steven K. Beckner
(MaceNews) – After holding its interest rate settings steady for nine months, despite growing pressure from President Trump, the Federal Reserve finally lowered them Wednesday, but only by a quarter percentage point.
Notwithstanding a recent uptick in already elevated inflation, the Fed’s rate-setting Federal Open Market Committee erred on the side of supporting job creation as it reduced the federal funds rate by 25 basis points, taking its key policy rate down to a target range of 4.0% to 4.25%.
What’s more, FOMC participants projected another 50 basis points of monetary easing will be done at the Committee’s remaining two meetings of 2025 – 25 basis points more than projected in June. And while those projections are not binding commitments, Chair Jerome Powell gave strong indications that further cuts will in fact be made.
“With downside risks to employment having increased, the balance of risks has shifted,” he said in his post-FOMC press conference. “Accordingly, we judged it appropriate at this meeting to take another step toward a more neutral policy stance.”
Powell said higher tariffs continue to exert upside risks on inflation remain which the Fed will need to monitor, but said, “a reasonable base case is that the effects on inflation will be relatively short-lived—a one-time shift in the price level.”
Dissenting from the 11-1 majority in favor of more aggressive monetary easing was Stephen Miran, President Trump’s Council of Economic Advisers chair whom he nominated to fill a Board of Governors vacancy left by the August resignation of Adriana Kugler, who was confirmed by the Senate Monday evening. He argued in favor of a 50-basis point reduction.
Although Trump had tried to fire her “for cause,” Governor Lisa Cook was also on hand to vote for the 25 basis point cut, thanks to a court order staying her firing.
Explaining its action in a policy statement, the FOMC said, “Recent indicators suggest that growth of economic activity moderated in the first half of the year. Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.”
In contrast to its July 30 policy statement, when it cited risks to both sides of its mandate,
the FOMC now adds the assertion that “downside risks to employment have risen.” That was a point Powell made repeatedly in his press conference.
Implying further monetary easing to come, the FOMC stated, “In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”
The FOMC’s new quarterly Summary of Economic Projections anticipated the funds rate will fall considerably further in coming months and years.
In their newly revised SEP, the 19 FOMC participants projected the funds rate will fall to a median 3.6%, implying two 25 basis point rate cuts at the Oct. 28-29 and Dec. 9-10 meetings to a target range of 3.5-3.75%. In the last SEP published in June, the projection for the end of this year was 3.9%.
The funds rate is projected to fall further to a median 3.4% (3.25-3.50%) by the end of 2026, and to 3.1% (3.0-3.25%) by the end of 2027.
The 2027 projection would leave the funds rate just a tenth above the FOMC’s 3.0% estimate of the “longer run” funds rate – often called the “neutral rate,” which includes the 2% inflation target plus a postulated “real” interest rate of 1%.
Those funds rate projections are predicated on forecasts that inflation will move closer to the Fed’s 2% target in a climate of moderating growth and employment.
As Powell noted, the median funds rate projections mask “a wide dispersion of views,” with nine of the 19 officials projecting no rate cuts or fewer rate cuts. He said this is ‘understandable and natural in the current situation” – one of “tension” between the Fed’s “price stability” and “maximum employment” goals.
In such a “difficult situation,” where the Fed faces “risks affecting the labor market and inflation, … we have to balance those two.”
The new funds rate “dots” were accompanied by revised economic forecasts. The officials now expect that PCE inflation will end 2025 at 3.0%. Core PCE inflation is expected to close out this year at 3.1%. PCE inflation is forecast to fall to 2.6% in 2026. two-tenths higher than forecast in June, and to 2.1% in 2027 – just a tenth above target.
FOMC participants modestly raised their 2025 GDP growth forecast from 1.4% to 1.6%. — two-tenths below their 1.8% estimate of the longer run GDP growth rate (or “potential”). The unemployment rate is forecast to rise to 4.5%.
There had been some speculation the FOMC might do a “catch-up” cut of 50 basis points at Wednesday’s meeting, but apart from Miran’s dissent, Powell said “there wasn’t widespread support at all” for a larger move.
However, he observed that participants are projecting more rate cuts than they were a few years ago, and he added that “you’ve got to look at the whole path of rates,” not just the FOMC’s initial 25 basis point rate cut, evidently referring to the recent decline in bond yields and related mortgage rate declines.
“The market has already been baking in expectations” of further funds rate cuts, he continued. “Our market works through expectations, so I think our policy path really does matter and I think it’s important that we use our tools to support the labor market when we do see signs like that.”
Powell insisted the FOMC made its decision based on recent data, not because of pressure from Trump, and he continually emphasized how the “balance of risks” to the Fed’s dual mandate has shifted so as to warrant a resumption of the process of moving the funds rate “toward neutral.”
“I think there’s quite a wide assessment that the situation has changed with respect to the labor market,” he explained. “Whereas, we could still say, and did say, in July … that the labor market was in ‘solid’ condition and we could point to 150,000 jobs per month and many other things, I think that the new data we’ve had …. suggests that there is meaningful down side risks.”
Powell said there had been downside risks at the time of the July meeting but “that risk is now a reality and there’s clearly more risk. So, I think that’s broadly accepted.”
The Fed chief said the FOMC must still “keep our eye on inflation,” but added, “At the same time, we cannot ignore and must keep our eye on maximum employment.”
The FOMC faced a challenging set of economic statistics, which pointed in opposite directions on the Fed’s “risk management” landscape.
On the “price stability” side of the Fed’s dual mandate, inflation at the retail price level edged further above the Fed’s 2% target in August, as the consumer price index rose 0.4%, up from 0.2% in July, and 2.9% from a year ago, up from 2.7%. The core CPI climbed 0.3% or 3.1% year-over-year.
Taking some of the sting out of the CPI report perhaps, the producer price index fell 0.1% last month, suggesting some lessening of wholesale price inflation in the pipeline. The FOMC might also have taken some encouragement from a New York Fed survey showing that medium to longer term inflation expectations remain “unchanged,” even as shorter term expectations rose.
In any case, policymakers put a greater weight of concern on mounting evidence of labor market softness that seemingly puts at risk the Fed’s “maximum employment” mandate – belatedly so in the view of Trump, who has taken to calling the Fed chief “Too Late Powell.”
In August, non-farm payrolls grew a meager 22,000, far less than expected, and prior months’ gains were revised lower to push the average gain over the last three months below 30,000. The unemployment rate rose a tenth to 4.3%.
Subsequently, the Labor Department added to the impression of softness when its annual revisions to non-farm payrolls for the year prior to March 2025 showed 911,000 fewer jobs created than initially estimated.
And there have been other worrisome employment indicators. Jobless claims jumped by a worse-than-expected 27,000 in the week ending Sept. 6 to 263,000 – highest in four years. Some argue that the slowdown in job growth reflects, in part, weaker labor force growth due to the Trump administration’s staunching of illegal immigration (a factor Powell acknowledged), but that didn’t stop the FOMC from acting to support “maximum employment.”
Since their late July meeting Powell made clear he and his fellow policymakers have become increasingly concerned about a softening labor market and about whether monetary policy was too restrictive. He said slower growth of payrolls partially reflects “very lower amount of people joining the labor force,” but said “We’ve also got much lower demand,” with the result that the unemployment rate has begun to rise.
Powell said “4.3% is still a low level, but …. this speedy decline in both supply and demand has certainly gotten everyone’s attention.”
As a result, he said the FOMC majority decided it was “appropriate” to “move toward neutral.”
As always, he said monetary policy is “not on a preset course” and will be conducted on a “meeting-by-meeting” basis. But he left little doubt where rates are headed.
The FOMC made no immediate change in its balance sheet policy, repeating that “the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities.”
Asked whether it was not contradictory to be cutting rates while doing “quantitative tightening,” Powell denied the Fed’s shrinking of its securities portfolio is having much adverse impact on the economy.
“We’re still in abundance reserve condition, and we’ve said that we’ll stop somewhat above an ample reserve level and that’s what we are,” he said. “We’re getting closely to that. We don’t think that has significant macro effects. These are pretty small numbers moving inside a giant economy.”
“The level of runoff is not very large. so I wouldn’t attribute macro economic consequences to that at this point,” he added.
In conjunction with the 25 basis point decrease in the federal funds rate, the FOMC lowered the minimum bid rate on standing overnight repurchase agreement operations to 4.25%. The offering rate on standing overnight repurchase agreements was lowered to 4.9%.
At the same time the Fed Board of Governors reduced the primary credit rate, at which it lends to member banks at the discount window, by 25 basis points to 4.25%. The rate of interest paid to banks on reserve balances was reduced to 4.15%.