Fu Peng’s commentary on the September Fed meeting: “Shift in risk balance,” from inflation risk to employment risk! [Fu Peng Quick Review]

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“Risk Balance Shift”—From Inflation Risk to Employment Risk

The September Fed FOMC meeting was largely unsurprising. Powell essentially stuck to the “risk balance shift”—the thinking that focus is moving from inflation risk to employment risk, and in several aspects reduced expectations of “recession-rate cuts.” This also supported bond yields and eased concerns about the US stock market.

On the topic of employment, he mentioned that risk has increased—labor demand is weakening significantly. He still cited tariffs as one of the reasons for this reduced demand. Employment growth has also notably slowed due to reduced immigration and declining labor force participation rates. Powell’s overall view is increasingly leaning toward the supply side's impact on the labor market (which reduces the expectation of a demand-side, i.e., recessionary, shock).

Inflation was mentioned frequently. Although inflation has dropped behind employment in importance, frequent mentions and terms like “still somewhat high” lowered certain expectations, and the overall impact of tariffs on inflation was still described as “to be observed,” which also reduced expectations of “recession-rate cuts.”

Powell’s definition: This is still a preemptive rate cut, called “risk management rate cut.” There is currently a wide divergence in interest rate expectations because there is not yet enough evidence to give clear future guidance for the economy and employment. So, it remains a pre-emptive move, which also decreases the expectation that action is taken only due to a recession.

On independence, he emphasized that the Fed will not abandon its independence, will not make decisions based on political considerations, but will act based on the data.

Market reaction—the main focus was on the movement of the US 10-year Treasury yield, which first fell then rose. Yields dropped below 4%, reflecting a “rate cut–recession–rate cut” expectation; then, following Powell’s remarks, things balanced out, recession expectations diminished, and yields returned to 4.05%. When yields fell below 4%, US stocks dropped and volatility increased, also reflecting a “rate cut–recession–rate cut” expectation. However, as Powell spoke, recession expectations faded and the market reversed.

The market cares about whether this is a recession rate cut, but for now it appears to still be “risk management rate cut,” with employment concerns perhaps more from supply factor, inflation remains “somewhat high”—all of which reduces the probability of a recession. Certain forecasts are not plans, and policy has no preset path. In short, the Fed's move is not because a recession has happened, but as a precaution. There is no fixed path ahead; after this preemptive move, they will observe subsequent data and move accordingly, which actually lowers the expectation of continuous action.

The US 10Y Treasury is still trading in this three-plus-year triangular range. The emphasis has changed, forward guidance is now defensive and hedged, and unless data confirms a certain “recession,” the 10Y’s yield may not offer guidance; the market's volatility also does not show a “recession” reaction.

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Risk Warning and DisclaimerThe market has risks, investment must be cautious. This article does not constitute individual investment advice, nor does it take into account the individual investment goals, financial condition, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article suit their own situations. If you invest accordingly, you do so at your own risk. ```