{"id":207910,"date":"2025-09-19T07:40:46","date_gmt":"2025-09-19T07:40:46","guid":{"rendered":"https:\/\/ibkrcampus.eu\/campus\/?p=207910"},"modified":"2025-09-19T08:45:04","modified_gmt":"2025-09-19T08:45:04","slug":"fed-delivers-dovish-shift-restarts-rate-cutting-cycle","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.eu\/campus\/traders-insight\/securities\/macro\/fed-delivers-dovish-shift-restarts-rate-cutting-cycle\/","title":{"rendered":"Fed Delivers Dovish Shift, Restarts Rate-Cutting Cycle"},"content":{"rendered":"\n

Originally Posted September 17 2025 \u2013 Fed Delivers Dovish Shift, Restarts Rate-Cutting Cycle<\/a><\/p>\n\n\n\n

The Federal Reserve cited increasing risks to the U.S. labor market as a reason to ease monetary policy.<\/p>\n\n\n\n

\"Fed<\/figure>\n\n\n\n

The Federal Reserve resumed its rate-cutting cycle at the September meeting, lowering its policy rate by 25 basis points (bps) to a range of 4%\u20134.25%, after being on hold since its previous cut in December. The Fed also signaled a less restrictive stance to come amid mounting labor market weakness. We are aligned with market consensus and Fed projections in forecasting two more 25-bp interest rate cuts before year-end.<\/p>\n\n\n\n

The tone of the Fed statement \u2013 alongside updated projections (the \u201cdot plot\u201d) signaling expectations for a string of interest rate cuts and Chair Jerome Powell\u2019s press conference \u2013 indicated that concerns over weakening labor market activity have begun to outweigh concerns over inflation, which remains largely driven by tariffs. At the same time, the labor market deterioration was not deemed substantial enough to warrant accelerated cuts. Powell characterized the 25-bp cut as a \u201crisk management\u201d move, while underscoring that a 50-bp cut wasn\u2019t seriously discussed.<\/p>\n\n\n\n

The decision was not unanimous. Newly confirmed Governor Stephen Miran dissented in favor of a larger 50-bp cut, while the dot plot indicated one official preferred to keep rates unchanged at this meeting. Nonetheless, the majority of officials appear to support a gradual path toward neutral monetary policy \u2013 which the central bank estimates to be around 3% \u2013 over the next few years.<\/p>\n\n\n\n

The Fed also maintained its current balance sheet policy of gradually reducing its holdings of U.S. Treasuries and agency mortgage-backed securities. (For our latest views on the Fed\u2019s mortgage holdings, please read PIMCO Perspectives<\/em>, \u201cA Fed Housing Fix That\u2019s Hiding in Plain Sight<\/a>.\u201d)<\/p>\n\n\n\n

Well-telegraphed move doesn\u2019t rattle markets<\/h2>\n\n\n\n

The Fed\u2019s decisions were broadly in line with expectations. Market reaction was initially muted, but yields on intermediate-maturity U.S. Treasuries rose and ended the day modestly higher.<\/p>\n\n\n\n

Ahead of the meeting, futures markets were already pricing a high probability of two additional 25-bp rate cuts this year. The Fed\u2019s longer-run path toward neutral had already been priced in as well, as investors anticipated that policymakers would respond to deteriorating labor conditions.<\/p>\n\n\n\n

Labor market risks drive statement and forecast revisions<\/h2>\n\n\n\n

The Fed\u2019s statement reflected a shift in emphasis, highlighting that \u201cdownside risks to employment have risen,\u201d while saying inflation remained \u201csomewhat elevated.\u201d These labor market concerns not only prompted the rate cut at the September meeting but also led to changes in Fed policy projections. The median projection now anticipates a total of 75 bps of cuts by the end of 2025, implying two additional 25-bp cuts in October and December. The median just narrowly edged down, with nine Fed officials still preferring easing by less than 75 bps this year. The downward rate path revisions also suggest that while the Fed views labor market risks as warranting a faster pace back to neutral, economic conditions haven\u2019t deteriorated enough to warrant moving policy into accommodative territory.<\/p>\n\n\n\n

The newly introduced 2028 dots showed Fed officials anticipate policy rates to return to neutral by then, consistent with the long-run rate estimate. Interestingly, the longer-run dots converged toward the median projection of 3%. Officials who had previously projected a long-run rate above the median revised their projections down, while one or two of the lower estimates were adjusted slightly higher.<\/p>\n\n\n\n

Chair Powell\u2019s tone was measured<\/h2>\n\n\n\n

Although yields ticked a few basis points higher throughout the press conference, we thought Powell\u2019s comments were measured. He characterized the rate cut as a \u201crisk management\u201d move, and suggested that a 50-bp cut was not seriously discussed. At the same time, he emphasized the Fed\u2019s commitment to its dual mandate and acknowledged increased downside labor market risks. His discussion of slowing hiring momentum and weaker labor supply and demand growth (which he called \u201ca curious balance\u201d) was a shift in tone relative to the July press conference, when he focused more on supply-side dynamics.<\/p>\n\n\n\n

Inflation has remained somewhat elevated, pressured by tariff-related price adjustments \u2013 particularly in goods. But Powell emphasized that inflation expectations look stable. He framed the rate cut as \u201ctaking a step toward neutral\u201d and noted the Fed has plenty of room to react if labor market activity begins to contract.<\/p>\n\n\n\n

Looking ahead: a complex landscape for policymakers<\/h2>\n\n\n\n

Political pressure on the Fed has been building, particularly after clear signs of weakness appeared in the labor market data. However, the combination of tighter immigration policy, AI-driven labor displacement, and tariff-related supply shocks has created a complex environment for monetary policy. In our view, the Fed\u2019s decision to cut rates reflects its effort to balance the need to support growth and employment with the imperative to maintain inflation credibility.<\/p>\n\n\n\n

Looking ahead, the key questions will be whether productivity gains from AI and automation can offset labor supply shocks and reaccelerate economic growth, with fiscal policy in 2026 potentially providing additional support.<\/p>\n\n\n\n

For now, the Fed has made its move. It has also signaled it\u2019s ready to do more if labor markets are further strained by this year\u2019s various economic policy pivots on tax, trade, and immigration. (Learn more in our recent Macro Signposts<\/em> piece, \u201cU.S. Labor Markets: A Release Valve for Tariff Pressure?\u201d<\/a>) We believe a monetary policy approach of gradually moving interest rates toward neutral is a reasonable risk management strategy in this complex environment.<\/p>\n\n\n\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

The Federal Reserve cited increasing risks to the U.S. labor market as a reason to ease monetary policy.<\/p>\n","protected":false},"author":167,"featured_media":207911,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[15,808,146,12,148,7],"tags":[362,311,291,314,383],"contributors-categories":[441],"class_list":{"0":"post-207910","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-forex","8":"category-government-bonds","9":"category-macro","10":"category-securities","11":"category-text-articles","12":"category-traders-insight","13":"tag-economic-outlook","14":"tag-fed","15":"tag-macro","16":"tag-market-outlook","17":"tag-stock-market","18":"contributors-categories-pimco"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"\nFed Delivers Dovish Shift, Restarts Rate-Cutting Cycle<\/title>\n<meta name=\"description\" content=\"The Federal Reserve resumed its rate-cutting cycle at the September meeting, lowering its policy rate by 25 basis points (bps) to a range of 4%\u20134.25%,...\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.interactivebrokers.eu\/campus\/wp-json\/wp\/v2\/posts\/207910\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Fed Delivers Dovish Shift, Restarts Rate-Cutting Cycle\" \/>\n<meta property=\"og:description\" content=\"The Federal Reserve resumed its rate-cutting cycle at the September meeting, lowering its policy rate by 25 basis points (bps) to a range of 4%\u20134.25%, after being on hold since its previous cut in December. 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