Takeaways from the Fed’s First Cut Since 2024

‍Key Takeaways

• The Federal Reserve’s Federal Open Market Committee (FOMC) this week cut interest rates by 25 basis points, lowering the federal funds target rate range to 4.00% from 4.25%. Additionally, FOMC members signaled two more cuts were on the way this year (up from one cut they penciled in during their June meeting).
• The Fed now expects only one cut for 2026 and another for 2027, suggesting a faster easing cycle. The central bank also released its 2028 projections with no cuts, meaning that year would end with a federal funds target rate at 3% to 3.25%.
• Policymakers stated low unemployment figures had edged up, and downside risks to employment had risen. However, they also acknowledged the price-stability side of their mandate, which stated inflation had risen and remained somewhat elevated.
• The latest Summary of Economic Projections suggests to me the Fed believes growth will be slightly stronger than previously predicted, despite dropping the term “solid” from their policy statement this time around.  
• The sole dissenter was newly appointed Fed Governor Stephen Miran, who advocated for a 50-basis-point cut. I—along with the market—had expected more dissenters wanting a deeper cut.  

For me, the tone from Chair Jerome Powell at his post-meeting press conference was quite neutral, though the market had been pricing in a more dovish cut. In my view, it’s important to keep in mind today’s action was indeed a cut, and members now expect the number of cuts for the rest of the year to increase from one to two. On this note, I’m surprised the markets have largely ignored the Fed’s sensitivity over continued inflationary pressures. Powell continues to suggest the impact of tariffs on inflation haven’t been fully felt one way or the other, but they are currently bleeding into inflation—though he expects it may be a one-time price shift.  

In today’s highly politicized world, I think it’s unsurprising the first question at Powell’s presser was not about policy or the economy but about the political environment and its impact on the Fed. I continue to believe, much as Powell suggested, today’s Fed will maintain its focus on the goals given to them by Congress and not be guided by politics.  

The Fed’s most recent statement showed only small edits from July, though the changes were mostly focused unemployment and uncertainty.

After the Fed announcement, the 10-year Treasury ended the day lower and finished at 4.06%; short and long rates were unchanged. The Dow Jones Industrial Average and S&P 500 Index returned 0.06% and -0.01%, respectively, for the day.

10-Year Treasury Yield over the Past 12 Months

In Conclusion
As I’ve said before, I think we should be paying attention to where the car is headed more than where the car sits today. The Fed is right to cut today. Importantly, however, I’d argue there are emerging signs of firming growth, and there remains significant stimulus in the pipeline from rising incomes, higher asset valuations, the AI revolution, and a pickup in capex expectations stemming from the One Big Beautiful Bill. I’m in the camp that two cuts over the next three months might be one too many because I worry inflation may soon again become job No. 1 for the Fed.

Definitions

One basis point is equal to 0.01%.

Capital expenditures or capex refers to a company’s capital expenditures.

The Consumer Price Index (CPI) measures the overall change in consumer prices based on a representative basket of goods and services over time. Core CPI is the change in prices of goods and services, except for those from the food and energy sectors.

The Core Personal Consumption Expenditure (PCE) Price Index provides a measure of the prices paid by people for domestic purchases of goods and services, excluding the prices of food and energy. The core PCE is the Fed's preferred inflation measure.

The federal funds rate is the target interest rate set by the Fed at which commercial banks borrow and lend their extra reserves to one another overnight.

The Federal Reserve’s Federal Open Market Committee (FOMC) makes key decisions about interest rates and the growth of the United States money supply.

Dovish describes monetary policy or a person's outlook that favors low interest rates and looser monetary conditions to stimulate economic growth and reduce unemployment, even at the potential risk of higher inflation.

The Dow Jones Industrial Average index (DJIA) tracks the share price of the top 30 large, publicly owned U.S. companies which is often used as an indicator of the overall condition of the U.S. stock market.

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. Real GDP is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year.

The S&P 500 Index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.

The Summary of Economic Projections (SEP), known in formally as the “dot plot,” is a collection of forecasts for the economy, inflation, the labor market, and interest rates offered by the seven Fed governors and 12 regional Fed presidents.

U.S. Treasury notes are debt securities issued by the U.S. and are loans made by the investor to the government with varying lengths of maturity.

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