The Summer I Cut Rates

“When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate.” - Jay Powell

The Federal Reserve lowered its benchmark interest rate by a quarter of a percentage point on Wednesday, citing rising risks to the labor market as the key driver behind its first rate cut since December 2024. The move, which has been widely expected per Fed Funds Futures since the July jobs report, brings the target federal funds rate to a range between 4.00%–4.25%.

In the official policy statement, the central bank acknowledged that its assessment of the labor market has changed, with officials now seeing the “downside risks to employment have risen,” a notable shift from previous meetings when the focus remained on inflation and the labor market was characterized as “solid.”

Once again, the decision was not unanimous. Stephan Miran, who had been sworn in just prior to the start of the 2 day policy meeting, dissented in favor of a larger 50 bps cut.

Governor Lisa Cook also participated after a federal appeals court allowed her to remain on the board pending litigation — an unprecedented legal and political backdrop for an FOMC meeting.

The latest Summary of Economic Projections (SEP) showed most officials foreseeing another half percentage point of cuts by year-end. The “dot plot” was notably scattered: seven of the nineteen participants penciled in no further cuts this year, two saw one more cut, nine projected two more cuts, and one even anticipated five additional cuts. This dispersion underscores just how contentious the next few meetings could be.

Chair Powell did not frame this cut as a “recalibration” of policy like he did in 2024. This time, the cut was described as “risk management.” Zooming in, recalibration suggests bringing policy back into alignment through fine-tuning, while risk management reflects a more forward-looking strategy in the face of uncertainty. Essentially, this cut was not about signaling that policy was mismatched with the economy, but about recognizing that downside risks to employment have risen enough to warrant insurance against a deeper slowdown, particularly amid evolving trade and immigration policies.

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