Powell walks the tightrope with the latest FOMC decision

Key Points

• • The Fed cut rates by 25 basis points, with two more expected this year.
  • There is no change to the rate of Fed balance sheet runoff (QT).
  • FOMC dot plot projections reflect a mildly dovish long-run monetary policy, but not sufficient to antagonize the bond market.

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Chair Jerome Powell announced a 25 basis-point cut in the fed funds target rate. The Target range for the federal funds rate is now 4.0%-4.25%.

There was only one dissent, from new Trump appointee Stephen Miran, who wanted a 50 basis point cut.

What’s new in the FOMC statement:

Recent indicators suggest that growth of economic activity moderated in the first half of the year.

Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.

FOMC economic projections reflect a broadly balanced economy, with unemployment rising slightly to 4.5% before easing to 4.2% in the long run. Real GDP growth is expected to slow to 1.6% in 2025, increasing to 1.8% in the long run. Median PCE inflation is projected to remain at 3.0% for 2025 before easing to 2.0% in the long run.

Dot Plot projections of the fed funds rate center around another two rate cuts of 25 basis points this year, with one outlier — possibly Miran — projecting five rate cuts.

Financial Markets

Financial markets already display signs of loose monetary conditions, with the Chicago Fed NFCI index falling to -0.558 for the week ended September 5.

Treasury Markets

10-year Treasury yields rallied off support at 4.0% on a less-dovish-than-expected FOMC projection.

Dollar & Gold

The US Dollar Index likewise found support on the prospect of higher-than-expected interest rates.

Gold retraced to test support at $3,650 per ounce.

Conclusion

The Fed cut 25 basis points as expected, with Chair Jerome Powell doing just enough to placate President Trump without caving to political pressure.

Dot plot projections reflect two more rate cuts of 25 basis points this year. The median fed funds rate of 3.0% is slightly higher than expected long-run inflation at 2.0%. The resulting real fed funds rate of 1.0% is somewhat dovish but not outright stimulatory. The Trump administration wants to run the economy hot, with higher inflation, to solve the fiscal debt crisis. At the same time, a negative real rate would antagonize the bond market and likely cause an upsurge in long-term yields.

Fed Chair Powell has skillfully negotiated a path between the bond market preference for higher real rates and the Trump administration’s demands for monetary stimulus. Antagonizing either group would risk a bond market revolt, the latter because it would invite increased Trump interference and possible dismissal of Powell “without cause.”

We do not expect the outcome to affect the secular uptrend in long-term Treasury yields, the dollar’s downtrend, or gold’s uptrend.

Acknowledgments

• Federal Reserve of St Louis: FRED Data
• FOMC: Summary of Economic Projections
• Wolf Richter: This Fed Meeting Must Have Been a Circus
• Adam Taggart with Axel Merk: Is The Fed Behind The Curve? If So, By How Much?
• Maggie Lake & Darius Dale: A 25bps Cut And More to Come?
• Federal Reserve: FOMC Statement