New Risks Require Policy Adjustment – Fed Rate Cut as ExpectedNew Risks Require Policy Adjustment – Fed Rate Cut as Expected
On September 17, at the conclusion of the FOMC meeting, the Fed lowered its policy rate by 25 bps, as expected, to a range of 4.0–4.25%. The decision was almost unanimous, with only one dissent: Stephen Miran, a new committee member appointed by D. Trump following the recent departure of Adriana Kugler, voted for a 50 bps cut. The post-meeting press release also noted that the Fed will continue reducing the size of its balance sheet, while risks to employment have increased. The committee emphasized that it remains attentive to risks on both sides of its dual mandate.
The Fed also released its September economic projections. The key change was a downward revision in the path of future rates: to 3.6% for 2025 and 3.4% for 2026. This confirmed the Fed’s readiness to cut rates again in October and December 2025 but also reflected caution toward further easing in 2026. Futures markets currently price in three cuts for 2026, while the Fed projects only one. Nevertheless, confirmation that the Fed is prepared to significantly lower rates in the near term is a positive signal.
The Fed’s GDP growth forecasts were raised to 1.6% for 2025 and 1.8% for 2026. Unemployment projections were little changed: 4.5% at the end of 2025 and 4.4% at the end of 2026. Core inflation, however, was revised up for 2026 to 2.6% y/y, while the 2025 forecast was left unchanged at 3.1% y/y. Market participants noted the inconsistency: rate cuts alongside stronger growth, stable unemployment, and higher inflation projections — an unusual situation for the Fed.
In his traditional post-meeting statement, Fed Chair J. Powell offered little new. His speech was cautious, filled with guarded and politically correct wording. In short: inflation has recently risen and remains elevated; risks to employment have increased. To balance these risks, the Fed decided to cut rates by 25 bps in September. The current labor market weakness is unusual, in part due to shrinking labor supply (linked to the deportation of illegal migrants). Goods inflation accelerated, but services inflation appears to remain in a disinflationary trend. The projected rate path was lowered by 25 bps, though Powell stressed this is not a preset plan or commitment.
Powell’s Q&A yielded more interesting insights:
He confirmed that current tariffs have partly shifted their impact onto the labor market by accelerating automation, rather than fueling inflation.
He stressed that the main reason for the rate cut was a reassessment of risks: earlier tilted toward inflation but now closer to balance, warranting policy adjustment.
He characterized the cut as a form of risk management, not a reaction to a sharp deterioration in the labor market.
Overall, the Fed is acting appropriately and is ready to respond quickly to changing conditions,
though inflation concerns remain a strong constraint. In our view, the Fed will cut rates twice more in 2025 — in October and December, by 25 bps each. Cuts in 2026 will depend heavily on inflation dynamics. The Fed’s projection of one cut in 2026 with core inflation at 2.6% reflects its conservative stance. We believe two cuts may be required in 2026, even if inflation is somewhat higher (around 2.9% y/y).
The start of the Fed’s easing cycle is a positive factor for equities, though inflation risks will clearly limit the pace of cuts. Much of this expectation is already priced in. Going forward, market dynamics will depend on how the economy responds: if lower rates support the labor market, boost consumer spending, and increase net hiring, this will be strongly positive for stocks. Conversely, if labor market reaction is weak but inflation ticks higher from the current 0.25–0.28% m/m pace in the core PCE deflator, markets may correct.
Looking at market expectations from two sources — the prediction market Polymarket and Fed funds futures — consensus points to continued easing at each of the next Fed meetings.
Polymarket data: October cut probability — 25 bps at 80%, 50 bps at 6%. December — 25
bps at 72%, 50 bps at 6%. Thus, Polymarket implies 86% and 78% odds of cuts in October
and December, respectively, or a 67% probability of two cuts by year-end.
Futures market: more dovish, pricing an 82.8% probability of two cuts by end-2025.
Freedom Broker’s base-case forecast aligns with market consensus: two cuts totaling 50 bps by year-end.
For equities, as the probability of two cuts nears 100%, the impact should be strongest for growthoriented, long-duration risk assets (small caps, fast-growing tech), as well as rate sensitive sectors outside the “growth” category (utilities, real estate). Still, since much of this is already priced in, a sharp rally in risk assets is unlikely.
On Wednesday, markets were subdued: the S&P 500 closed 0.1% lower, Nasdaq 100 fell 0.2%,
while the small-cap Russell 2000 gained 0.18%. In Thursday’s premarket (September 18),
sentiment is positive: S&P 500 futures +0.6%, Nasdaq +0.8%, Russell 2000 +1.0%.
Freedom Broker – Capital Markets Research
capitalmarkets@frhc.group
