The Fed cut the policy rate 25bp as expected. They think three more cuts will be enough to boost growth and prompt a revival in the jobs market, but the market is sceptical. We look for four more 25bp cuts before trade clarity, a weaker dollar and lower borrowing costs start to stabilise the situation, notes the ING*s analists.
As widely expected, the Fed has resumed cutting interest rates with a 25bp move today. There was only one dissenter – the recently appointed (temporary) Governor Stephen Miran – who voted for a 50bp cut. Ahead of time, there had been suspicion it could have been a three-way split, with Governors Michelle Bowman and Chris Waller potentially voting for 50bp (playing catch-up after they voted 25bp in July) with the possibility of one or two hawkish regional Fed bank chiefs voting for no change. In the end, there was relative unity amongst the officials.
Chair Powell described the move as a “risk management cut” since, on the face of it, the US appears in pretty decent shape. The economy grew more than 3% in the second quarter, inflation is above target at 3%, unemployment is low at 4.3% and equity markets are at all-time highs. But dig under the surface and things are shifting, most notably in the jobs market.
In the press release they have dropped „solid” with regard to the jobs market description, which is unsurprising after the recent soft run and major downward revisions to employment data – a point highlighted by Chair Powell in the press conference. It was this that was the main justification for the move, with the FOMC acknowledging that “downside risks to employment have risen… and in light of the shift in the balance of risks” decided to act.
Looking at the “dot plot”, the consensus amongst officials is two more cuts this year, which is in line with our own forecast and market pricing. Their June forecasts only had two cuts in total for the year. As for 2026, they continue to project just one further cut.
The fact that they revised growth and inflation forecasts higher and unemployment lower suggests that they think swift, sharp action over coming months will deliver real results for the economy. The market is not convinced by these softest of soft-landing projections and thinks the Federal Reserve will probably need to do more with an additional 2–3 cuts now priced over and above the Fed forecasts. This would get the Fed funds rate below 3% in the second half of 2026.
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