Fed review: Slim margins

• The Fed cut rates by 25bp in its September meeting, as widely anticipated.
• 9/19 participants saw only one more rate cut in the last two meetings of the year, or none. 9 participants expect two cuts, and one outlier (likely Miran) called for 125bp of additional easing. Hence, the slightest possible majority favours two cuts.
• We maintain our previous call and still expect only one more rate cut this year (in December), followed by three cuts in 2026, once per quarter.
• Markets price in 22bp of cuts by October, and 44bp by December. Key arguments for our more hawkish stance include the clear easing of financial conditions, elevated inflation expectations and relatively stable labour market balance.

The FOMC's decision to cut rates by 25bp was backed by a stronger consensus than some perhaps feared. Aside from Stephen Miran (who dissented for a 50bp cut), all voters supported the 25bp move.

The updated summary of economic projections revealed greater dispersion of views, however. One participant (likely a non-voter) saw that the Fed should not have cut rates at all today, or in the remaining meetings of the year. A total of 9 out of 19 participants called for a maximum of one additional cut (or no more cuts), whilst 9 out of 19 called for cuts in both of the remaining meetings of the year. One outlier, most likely Miran, called for 125bp of additional easing. That means that the slimmest possible majority favours cutting rates by (at least) two more times this year.

This also means that relatively small surprises in data could have a significant impact on the near-term rates outlook. The balance of power between the 'hawks' and the 'doves' could shift rapidly. Median forecasts for both growth and inflation were revised up for 2026. Powell emphasized that the rate cut was motivated by a shift in the balance of risks towards weaker labour markets, rather than deterioration of the baseline outlook.

We are still aligned with the hawkish camp in a sense that we think a gradual approach would be the best suited for the current environment. We do not think the outlook warrants rapid additional rate cuts, as financial conditions have already eased significantly this year. Improving credit growth and firms' order-inventory balances do not suggest the economy is headed towards an imminent slowdown.

The pass-through of tariff-related cost increases is still in its early days, and concluding anything on the persistence of price pressures is difficult when consumers' inflation expectations remain clearly elevated. And even the dreaded labour market still looks relatively balanced when accounting for the significant slowdown in supply growth. To quote Powell, 'It's not a bad economy'.

Admittedly, our call for an unchanged decision in the next meeting hinges on early October labour market data coming out solid, but we still prefer to position for higher short end USD rates. EUR/USD ended the evening close to pre-meeting levels, and we maintain our 12M forecast unchanged at 1.23.

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