The Fed cuts, cautiously

The Federal Open Market Committee cut the federal funds target by 25 basis points to a range of 4.00 to 4.25 per cent, the first move in a new easing cycle. The statement described the cut as "insurance" for a softening labour market. The decision also drew a dissent in favour of a 50-basis-point cut.

The cut is the first since December, when the Fed finished a run of three reductions and then paused for nine months to see how tariffs would affect prices. During that pause hiring slowed to a crawl: payrolls grew by just 22,000 in August, the unemployment rate rose to 4.3 per cent, and the annual benchmark revision removed 911,000 jobs from the year to March. The committee's statement acknowledged that the downside risks to employment had risen.

A dissent worth watching

The call for a half-point cut shows growing worry inside the committee about how quickly job growth is slowing. Weaker hiring and large downward benchmark revisions have persuaded the doves that policy is well behind the curve. Powell held the majority to a cautious quarter-point by pointing to the tariff costs still feeding into prices.

The dissenter was Stephen Miran, confirmed to the board only two days before the meeting and on unpaid leave from his post as the president's chief economic adviser. The more telling detail was who did not join him. Christopher Waller and Michelle Bowman, who had dissented in favour of a cut in July, voted with the majority this time, and so did Lisa Cook, whose removal the White House is contesting in court. The vote was 11 to 1, a wider consensus than the rhetoric around the meeting suggested.

Powell framed the decision at his press conference as risk management, not as the start of a rush to lower rates. He described policy as still modestly restrictive even after the cut, and said the committee would move meeting by meeting. That language leaves room to pause if inflation surprises on the upside, which is the flexibility the hawks wanted in exchange for agreeing to cut at all.

What the dots say

The quarterly projections matter more than the single cut. The median official now expects two more quarter-point reductions before the end of the year, which would take the target range to 3.5 to 3.75 per cent. Those projections are only a snapshot of individual views, and the spread among them was unusually wide, with some officials pencilling in no further cuts this year and Miran implying far deeper ones.

The committee meets twice more this year, on 28 and 29 October and on 9 and 10 December. Markets had already priced cuts at both, so the projections mostly confirmed expectations rather than shifting them. What would move markets is evidence that the committee's centre is drifting, either towards faster easing if unemployment keeps rising or back towards a pause if inflation picks up.

Insurance, the 1990s way

The idea of insurance cuts has a history. In 1998, after Russia's default and the collapse of the hedge fund Long-Term Capital Management, the Fed cut three times in quick succession even though the domestic economy was strong. In 2019 it made three cuts between July and October, a move Powell called a mid-cycle adjustment, to cushion a slowdown in global growth and trade tensions with China. In both cases the economy avoided recession and the Fed stopped after three moves.

The precedent is more comforting than it may deserve to be. In 1998 and 2019 inflation was at or below target, so the Fed could ease without worrying about prices. This time core inflation is running near 3 per cent and tariffs are still passing through, so the insurance comes with a premium: every cut risks letting inflation settle above target. That trade-off explains the caution, and why the committee chose a quarter-point rather than a half.

Not much help for borrowers

A quarter-point cut does little in the short run for companies facing a wall of debt to refinance, or for consumers paying eight per cent on car loans.

The transmission is uneven. The prime rate, which is set three percentage points above the top of the Fed's range, falls at once to 7.25 per cent, lowering the cost of credit cards, home-equity lines and many small-business loans within a billing cycle. Fixed-rate mortgages and corporate bonds are priced off longer-term Treasury yields, which had already fallen before the meeting in anticipation and have little further to go unless the Fed signals a much deeper cycle. Borrowers who were waiting for the announcement to lock in cheaper financing may find the market got there first.

Savers lose faster than borrowers gain. Yields on money-market funds and bank deposits track the policy rate closely, so households holding cash, who enjoyed the best returns in a generation over the past two years, will see income fall with each cut. Banks with large deposit bases may find their margins squeezed if lending rates fall faster than their funding costs.

Currency and bond markets took the decision calmly because it matched expectations. The dollar, which has weakened for most of this year, has less support as American short rates fall towards those elsewhere, although the European Central Bank has already finished most of its own cutting and the Bank of England is easing only slowly. Long-dated Treasury yields have stayed stubborn, a sign that investors see the cut as sensible for growth but not as a cure for large deficits.

The risk on either side

The hawkish case against the cut is that inflation has been above target for more than four years and that easing now invites expectations to drift. The dovish case is the dissent: that a labour market adding almost no jobs needs more than a token move. The committee split the difference, which is defensible only if the data cooperate.

The next employment report, due on 3 October, and the September consumer price index will decide which side gains ground before the October meeting. The 25-basis-point cut is a typical central-bank compromise, enough to acknowledge the weakness in jobs while keeping room to respond if tariffs push prices up again, and the dissent suggests larger cuts will follow if hiring keeps slowing.