Fed cuts target policy rate by 25 bps to 4%-4.25% as expected, resumes easing cycle after nine-month pause

• Fed says downside risks to employment have risen, forecasts two more cuts by year-end from just one in June
• GDP forecasts lifted slightly, says inflation has moved up and remains somewhat elevated
• New FOMC member Miran dissents in favor of larger 50 bps cut; July dissenters Bowman and Waller satisfied with 25 bps reduction

Bottom line: Dovish. Choosing to cut rates and guide expectations lower despite lingering inflation reflects an urgency about deteriorating employment conditions. Post-announcement curve flattening implies a vote of confidence in the FOMC amid personnel turnover and outside political influence.

Fed Chair Powell’s press conference:

Powell says rate cut reflects shift in balance of risks between mandates (price stability, full employment), downside risks to employment have risen

• Housing activity remains weak, demand for workers has dropped
• Inflation still ‘somewhat elevated,’ goods prices up, services decline, pass-through from tariffs has been ‘slower and smaller’ than expected
• Says risks to inflation mandate ‘less than one might think’ thanks to weaker job growth
• Powell says the ‘speedy decline in supply and demand’ in the labor market has everyone’s attention

Bottom line: By downplaying today’s move as a ‘risk management’ cut, Powell obscured the rest of his presentation, which was generally dovish and in line with the meeting statement. The presser was even-handed, but the Fed is clearly more concerned (read: rattled) about deteriorating employment than inflationary threats. To repeat, the flattening of the curve is an implied vote of confidence that the Fed is focused on the right issue.