An “awkward” risk-managed interest rate cut

```

The Federal Reserve cut interest rates by 25 basis points as expected. This is a typical "risk management rate cut," but appears somewhat "awkward" due to the contrast between economic forecasts and the rate cut path.

According to Chase Wind Trading Desk, Barclays analysts noted in their latest report that the economic forecasts of this meeting can be summarized as "awkward," because the FOMC raised GDP growth forecasts and lowered unemployment rate forecasts, while at the same time signaling a more accommodative policy than in June.

The dot plot shows the committee expects three rate cuts totaling 75 basis points this year, with one cut each in 2026 and 2027, which is 25 basis points more than the June forecast. Despite an improved economic outlook, downside risks in the labor market prompted the Fed to take a risk management approach. Powell emphasized at the press conference that significant slowing in employment growth and rising unemployment are key factors driving the rate cut.

Notably, new governor Stephen Miran voted to support a 50 basis point rate cut, casting the only dissenting vote. An unusually low rate forecast in the dot plot suggests that a member sees rate cuts of 150 basis points this year; analysts strongly suspect this came from Miran. There are still serious divisions within the committee on the degree of rate cuts, with six members favoring only one rate cut for the year, while most support three cuts.

Barclays maintains its expectation of a 25 basis point rate cut each in October and December by the Fed, and expects a pause in 2026 until inflationary pressures ease, then a 25 basis point cut each in March and June 2026.

An "awkward" divergence between economic forecasts and the rate path

Barclays pointed out that the latest Summary of Economic Projections (SEP) issued by the Fed presents a confusing mix: the economic outlook is actually more optimistic, but the rate path is more accommodative. Specifically, the FOMC raised actual GDP growth forecasts for 2025-2027, with 2025 and 2026 revised up to 1.6% and 1.8% respectively. Unemployment forecasts are also more optimistic, with projections for 2026 and 2027 revised down by 0.1 percentage points to 4.4% and 4.3%.

More noteworthy still is the change in inflation forecasts. The FOMC raised its 2026 inflation expectation by 0.2 percentage points to 2.6%, likely reflecting the sustained impact of tariff policy on price levels. Core PCE inflation is expected to accelerate from a monthly growth rate of 0.21% in August to 0.27% during September to December.

However, despite a stronger economic and inflation outlook, the rate path shown by the dot plot is 25 basis points lower than the June forecast. The median forecast shows three rates cuts this year to 3.6%, with one cut each in 2026 and 2027. In the traditional Taylor Rule framework, this combination appears "awkward"—typically, a stronger economic outlook should be matched by a higher rate path.

Labor market concerns drive risk management rate cuts

Barclays stated that the core logic for the Fed’s more accommodative policy lies in the sharp deterioration of the labor market. Chairman Powell emphasized at the press conference that this was a "risk management rate cut," primarily because of significantly slower employment growth and higher unemployment. Key data shows that as of August, the three-month average employment growth was only 29,000, far below the 99,000 as of May.

Powell especially mentioned that due to immigration restrictions and an aging workforce, labor force growth is slowing, and the breakeven point for job growth may have dropped to between 0 and 50,000, far lower than previous expectations. This assessment is crucial for investors, as it means if employment growth stays within this range in coming months and other labor market indicators do not deteriorate, the Fed may pause rate cuts.

There is still significant internal division within the FOMC about the policy path. The dot plot shows an obvious bimodal distribution: six participants favor only one more rate cut this year (i.e., no further cuts), and only two support two rate cuts. Notably, new governor Miran's dot is at 2.875%, implying support for a 150 basis point cut this year, in line with the Trump administration's call for rapid rate cuts.

Powell’s "hawkish remarks" downplay dot plot significance

Despite the dot plot sending a relatively dovish signal, Powell took a more hawkish stance at the press conference. He deliberately downplayed the importance of the dot plot, emphasizing it is just the sum of 19 individuals’ independent forecasts and not a plan or decision of the committee, and that policy is not on a pre-set path.

On inflation, Powell mentioned that goods inflation has picked up, possibly reflecting the impact of tariffs, and anticipated related price pressures will continue accumulating this year and next year. But he reiterated that it is the FOMC’s responsibility to ensure that one-time increases in the price level do not turn into persistent inflation.

Regarding political pressures and the Fed’s independence, Powell firmly responded that making decisions based on data is "deeply embedded in our culture," and other factors are never considered. This statement is crucial for investor confidence in an environment of political uncertainty.

In summary, Barclays maintains its base case expectation that the Fed will cut rates by 25 basis points each in October and December, mainly on grounds of ongoing weak job growth, a slight rise in unemployment, and worries about downside risks to employment. The risks are tilted towards a delay in rate cuts, especially if early 2026 inflation data continues to show strong price increases.

For 2026, Barclays expects the Fed to pause rate cuts until there is evidence in monthly inflation data of relief and confidence that inflation is on track to return to the 2% target. If the Fed's dual mandate no longer conflicts, 25 basis point rate cuts are expected for both March and June 2026, bringing the year-end federal funds rate target range down to 3.00%-3.25%, close to neutral levels.

~~~~~~~~~~~~~~~~~~~~~~~~

The above highlights are from Chase Wind Trading Desk.

For more in-depth interpretations, including real-time analysis and frontline research, please join [Chase Wind Trading Desk ▪ Annual Membership]

Risk Notice and DisclaimerThe market carries risk, so invest prudently. This article does not represent personal investment advice, nor does it take into account the particular investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are appropriate for their particular circumstances. Investing accordingly is at your own risk. ```