The Fed Cuts Rates for the First Time This Year.. Will It Continue?

SadaNews - In line with expectations, the U.S. Federal Reserve took its first rate cut of 2025 on Wednesday.

But will the central bank continue to follow predictions by enacting two additional cuts before the end of the year? The data does not suggest that.

Forecasts in the futures market oversimplify a binary path regarding interest rates: one that satisfies the markets, and the other, which is the more likely path, may mean that the rate cut enacted this week will be the only one this year.

The "Dot Plot" Reflects Division

Let’s take a look at what is known as the "dot plot" of the Fed, a chart showing the expectations of the seven members of the board of governors and the 12 presidents of the regional federal banks regarding the direction of interest rates without revealing their identities. The most circulated statistic is the "median dot," which reflects the market's expectation of two additional cuts.

However, a closer look at the distribution shows that opinions are clearly divided into two camps: a group of 6 members who believe that Wednesday's cut is sufficient for the year, and a larger group (so far) of 9 members who expect two additional cuts. The picture is completed by two members expecting only one cut, and two outliers: one advocating an unrealistic easing of 125 basis points and the other believing that the Fed should not have moved at all this week.

The Labor Market is Key

Which of these two binary paths is more likely at present? The answer lies in the state of the labor market.

The more dovish camp seems to be based on the observation that the labor market, according to Federal Reserve Governor Christopher Waller, is "approaching a stage of complete slowdown." They do not deny that tariffs are raising prices for consumers, but they view this as a temporary factor that should be ignored in policy-making. They cite weak recent employment data to justify calls for further cuts.

However, their argument is complicated by supply-related factors in the labor market, the most crucial of which are new immigration restrictions, deportations, and the general climate of fear among non-citizens. Companies may be hiring fewer people simply because the number of available workers has decreased, which is why officials like Chicago Federal Reserve Bank President Austan Goolsbee are calling for a focus on ratios instead of net employment figures.

Stability Indicators... Not Recession

It is worth noting that the unemployment rate remains only at 4.3%, which would have been considered an achievement in previous years. The employment rate, at 3.3%, is weak but stable since mid-2024. The rate of layoffs and resignations is close to 1.1%, with little change.

Meanwhile, the number of initial jobless claims was 231,000 during the week ending September 13, a number that is not remarkable, especially after it was revealed that the sudden jump in the previous week was due to fraud in Texas.

Thus, the decline observed in the economy and labor market in recent quarters may have begun to wane, raising the possibility that dovish policymakers at the Fed may risk evaluating policy from a retrospective perspective, similar to looking in the rearview mirror.

Consumption Recovers and Growth Returns

Retail sales rose in August for the third consecutive month, and consumption has started to expand again when adjusted for inflation, following a period of stagnation in the first half of the year.

While the quarter is not yet over, the Atlanta Fed's "GDP Now" tool indicates that GDP in the third quarter is heading toward an annual growth rate of 3.3%. Despite the limitations surrounding this tool, it has repeatedly outperformed the predictions of private sector economists in an unpredictable post-pandemic economy. The stock market – while not an ideal indicator of economic activity – is at an all-time high, supporting household wealth and boosting future spending.

The Effects of Trump’s Tariffs Decline

One possible explanation is that the U.S. economy experienced a temporary disruption due to the uncertainty caused by the "Day of Liberation" tariffs imposed by President Donald Trump, but it is starting to regain its balance. While some obstacles remain, claims that growth has ended seem exaggerated in light of current data.

If it turns out that the overly dovish camp in the "dot plot" was wrong, then the "no change" camp will automatically assert itself.

In reality, this camp resembles the dovish one, as it acknowledges the relatively high inflation but does not give tariffs significant weight in the analysis, assessing the labor market as Jerome Powell described it in his speech in Jackson Hole last month, as being "in a strange state of equilibrium resulting from a noticeable slowdown in both labor supply and demand." But they seem not to take this fragile equilibrium for granted.

The Political Impact

Unfortunately, politics cannot be ruled out at this stage. Trump continues his repeated calls for a significant rate cut (far exceeding what has been discussed in this analysis), attacks Fed Chairman Powell on social media, and uses the Justice Department to attempt to dismiss Lisa Cook, a Fed governor who disagrees with him.

Cook won the latest legal round against him in the appeals court this week, but Trump has now taken the case to the Supreme Court demanding permission to dismiss her. The outcome of this battle will be crucial for the future of the Fed's independence and the data-driven policy-making approach.

So far, institutional figures continue to dominate within the Fed, but it is hard to imagine that any member of the Open Market Committee responsible for setting interest rates can completely ignore the political noise. Even the noblest technocratic staff are, after all, human.

Nevertheless, the political impact may be balanced this year: some members may unconsciously lean toward easing in anticipation of administrative reactions, while others may take a more hawkish stance out of an instinctive refusal or defiance.

Labor Market Data

Overall, monetary policy decisions will remain dual-directional in the near term: either the labor market collapses, or the easing cycle has temporarily ended.

At present, the second scenario seems more likely — which may be good news for American workers, but bad news for dovish bond investors and for President Trump.