Dongfang Jin Cheng: Fed Restarts Rate Cuts, Future Policy Path Remains Complex

On Wednesday, September 17, Eastern Time, the Federal Reserve's monetary policy committee announced that the target range for the federal funds rate was lowered from 4.25%-4.5% to 4.00%-4.25%, a cut of 25 basis points. This marks the Fed's first decision to cut rates within nine months since the beginning of the year. The latest statement新增ly pointed out that U.S. job growth has slowed, the unemployment rate has risen slightly, downside risks to employment have increased, and the balance of risks has shifted, while removing the description of the labor market as "robust."

Specifically, newly appointed Governor Milan, personally selected by Trump, cast a dissenting vote, advocating for a 50-basis-point rate cut. The two officials who opposed the previous meeting's decision supported this rate resolution. The median interest rate forecast indicates that the Fed expects a total of three rate cuts this year, one more than the previous projection, with an additional cut next year. The dot plot shows that nine officials expect two more rate cuts within the year, though this number does not constitute a majority; six expect no further cuts this year, and one anticipates five rate cuts, totaling 150 basis points for the year. The Fed raised GDP growth expectations for this year, next year, and the following year, lowered unemployment rate expectations for next year and the following year, raised PCE inflation expectations for next year and the following year, and expects inflation to reach the 2% target by 2028.

After the meeting, Powell stated that this rate cut was a risk management decision, and there was no need to adjust rates rapidly; a 50-basis-point cut did not receive broad support. The highly unusual economic situation has led to significant divergence in the Fed's rate forecasts; major revisions to employment data were primarily due to low survey response rates; the transmission of tariffs to inflation has been slower and smaller than expected, with tariffs contributing 0.3-0.4 percentage points to core PCE inflation. At the same time, he reaffirmed the Fed's firm commitment to maintaining independence.

Bai Xue noted that the core trigger for this rate cut is the recent deterioration in employment data, whose speed, magnitude, and potential risks far exceed the mild rebound in inflation. The Fed needs to implement a "preventive rate cut" to address the potentially accelerating deterioration in the employment situation. The meeting statement removed the description of the labor market as "robust," which had been mentioned for six consecutive quarters, and新增ly added phrases such as "job growth has slowed, the unemployment rate has risen slightly, and downside risks to employment have increased," emphasizing that "the balance of risks has shifted." These wording adjustments signal a shift in the focus of the Fed's monetary policy objectives toward "stabilizing employment."