Financial News for the Week of September 19th, 2025

The Federal Reserve resumed its easing cycle after a nine-month pause, cutting the policy rate by 25 basis points at this week’s FOMC meeting. The move was widely anticipated, and while bond yields initially dipped, they ultimately rose as markets digested the broader implications. Equities, however, rallied, with the S&P 500 climbing another 1% on the week at time of writing.

The FOMC statement signaled a shift in emphasis from the ‘price stability’ mandate toward ‘full employment’, noting that “downside risks to employment have risen”. This echoed Fed Chair Powell’s remarks at Jackson Hole last month and set the tone for what he later described as a “risk management cut”. In essence, while inflation remains elevated, the Fed deemed it prudent to begin easing the policy rate to help guard against further labor market deterioration.

The decision was accompanied by the latest Summary of Economic Projections (SEP), which offered a mixed picture. Unemployment rate forecasts were largely unchanged, while growth projections for 2025 and 2026 were nudged up 20 basis points (bps) to 1.6% and 1.8%, respectively. Core inflation expectations for next year were also bumped up by 20 bps to 2.6%, with this measure now projected to return to target only by 2028 – which would mark seven consecutive years above the Fed’s 2% goal. The median forecast now calls for three cuts by year-end (including this week’s) up from two, and is in tune with our expectations. But one member projected the equivalent of three jumbo 50 bps cuts total (Chart 1). Stephen Miran, President Trump’s newly appointed Fed governor, is likely the one projecting more aggressive cuts as he was the lone dissent at this week’s meeting, favoring a larger 50 bps cut.

Economic data released this week did little to bolster the case for continued easing. Initial jobless claims fell back last week, following a surge in the week prior. And while housing remained a soft spot, with homebuilding pulling back in August, consumption-related data came in better than anticipated. August retail sales and food services rose 0.6% on the month, matching July’s gain. Sales in the ‘control group’ – which strip out volatile components – rose a solid 0.7%, building on gains in the prior two months (Chart 2). While tariffs are still expected to chip away at spending power and weigh on consumption, this recent data suggests consumers may still have some gas in the tank.

The bottom line is that while the Fed has resumed rate cuts to guard against further labor market weakness, its “risk management” approach means future moves will remain highly data dependent. The Fed will continue to have a hard time balancing the risks with respect to its dual mandate. But ultimately, we believe that the tariff impact on inflation will be temporary, and we expect the central bank to continue to cuts rates to support the economy (see our latest Quarterly Economic Forecast here).