Fed Cuts Rates, but Path Forward “Not Incredibly Obvious”

The Federal Open Market Committee (FOMC) on Wednesday announced a 25-basis point cut to the federal funds rate, bringing its key policy rate to a range of 4.0–4.25%. While this move was largely expected, the FOMC’s new dot plot of rate expectations going forward was less so, with a narrow majority signaling the need for two additional 25-basis point cuts before year end as well as one each in 2026 and 2027 as it moves toward a neutral policy setting.

The FOMC’s latest Summary of Economic Projections indicated that the median committee member had increased expectations for economic growth and inflation over the forecast period and decreased expectations for the unemployment rate. While these shifts may seem contradictory to the easing trajectory, they highlight the uncertain path forward as the committee seeks to balance upside risks to inflation and unemployment.

• Inflation. Federal Reserve Chair Powell highlighted that goods inflation has increased due to tariffs and has added to core PCE inflation, though moderating service sector inflation has served as an offset. Notably, Powell sounded more confident that tariffs were likely to have a one-time impact on inflation; he noted, however, that while firms to date have absorbed the bulk of the tariffs, they are likely to pass those costs on to consumers eventually.
• Labor market. Powell mentioned the labor market sits in a “curious balance,” with both demand and supply softening largely due to changes to immigration policies and, to a lesser extent, tariffs. Though the labor market persists in its current low-hire/low-fire equilibrium, there are upside risks if layoffs pick up. Higher youth and minority unemployment are signs that labor markets are weakening.

Commenting on the range of policy views suggested by the dot plot, Powell remarked that such divisions were not surprising given the “unusual challenges” facing the economy. “There are no risk-free paths now,” he said. “It’s not incredibly obvious what to do.”¹