By Ahmad Assiri Research Strategist at Pepperstone
FOMC, as expected, cut rates by 25bp bringing the target range down to 4.00 – 4.25%. This move was fully priced by markets but the true significance lay not in the cut itself, rather in the context, tone and the updated Summary of Economic Projections SEP. Together, these painted a picture of the Fed’s evolving risk calculus.
The Fed acknowledged that risks to employment are now more visible, particularly with the recent labour market revisions, and that economic growth has slowed relative to the first half of the year. Gone is the repeated phrase that the labor market remains strong. Instead, the statement now warns that downside risks to the labor market have increased. Similarly, the description of growth was revised to show that economic activity has slowed materially, with hiring numbers weakening. Implicitly, this is recognition that full employment is under mounting pressure.
Inflation still elevated, but balance of risks has shifted
On inflation, the Fed acknowledged that some components in goods and services ticked higher and that overall price growth remains above long term target, now around 3% versus the 2% goal. Employment clearly has entered the policy equation with more weight. Seen through that lens, the cut was not capitulation to politics or loss of control over prices but rather a macro-risk-management step to provide the economy breathing room while maintaining policy flexibility.
The SEP and forward guidance
The updated SEP reinforced this recalibration. Projections now show the policy rate ending 2025 at 3.6% (down from 3.9%) implying an additional ~ 50bp of easing by year-end. For 2026, the forecast dropped to 3.4% (from 3.6%) while 2027 remained unchanged at 3.1%. Fed introduced a 2028 forecast at 3.1% while the long-run neutral rate stayed anchored at 3.0%.
The message is twofold, the Fed is willing to cut further if labor market pressures persist but it envisions a structurally higher rate environment than the ultra-low regime of the past decade. In effect, policy is re-resuming a gradual easing with guardrails, sufficiently accommodative to support labour market and growth.
Powell’s messaging and Policy Language
Comparing this statement to prior iterations reveals deliberate changes. Slower growth, higher risks to jobs and the obvious change in language from maintaining the target range to lowering the target range. Powell underscored in his press conference that the Fed is not embarking on a rapid easing but is instead operating under a risk-management framework. The cut is a balancing act where the Fed is acknowledging the uptick in inflation on one side and labor market fragility on the other. The Fed’s next steps, he stressed, will remain data dependent rather thana pre-set course.
Cross asset reactions
Equities flirted with record highs but cooled on fears of sell the news, given that much of the easing was pre-priced. In bonds, short-end yields fell further while long-end yields held steady, steepening the curve. The dollar extended losses, briefly dipping into the 96 range before stabilising, while gold surged to fresh record highs above $ 3,700 oz before experiencing its sharpest pullback in weeks only to attract renewed buying in early trade today.
Fed Independence
The backdrop is politically charged. The appointment of Stephen Miran to the Fed’s Board of Governors raised concerns over central bank independence. His vote in favor of a deeper cut – unsurprising given his ties to Trump – adds another layer of risk and only more questions about the Fed independence. For gold, this dynamic provides support beyond inflation and dollar weakness, positioning it as a tool for hedging against the political risk.
The Fed’s move is best understood as exercise in risk management, supporting growth and jobs without abandoning the inflation worries. The SEP signals a gradual march toward lower rates but with the floor for terminal rate set materially higher than the ultra-low rate seen in pandemic era or last decade.
Markets absorbed the message with equities remain resilient but prone to potential tactical profit taking, the dollar stays under pressure and gold continues to shine.