No Risk-Free Path

First Cut of the Year

At its September meeting, the Federal Open Market Committee (FOMC) cut the federal funds target range by 25 basis points to 4.00%–4.25%, marking the first rate reduction of the year after eight months of holding steady. Policymakers framed the move as a risk management step, citing a combination of slowing job gains, a rising unemployment rate, and inflation that remains “somewhat elevated.” The Fed emphasized that while inflation has moderated from its peak, progress toward the 2% target has been uneven, and recent labor market data signaled cooling momentum. Updated projections indicated the possibility of two additional cuts by year-end and one more in 2026, suggesting a gradual easing cycle rather than an aggressive pivot. The decision came against a backdrop of mixed economic signals. GDP growth forecasts were revised slightly higher, reflecting resilient consumer spending, but payroll revisions and a rising unemployment rate raised concerns about underlying labor market strength. Inflation, while trending lower, remains above target, keeping the Fed cautious about cutting too quickly. This balancing act could be described as an insurance cut. Financial market reactions were mixed. Treasury yields fell across the curve, with the 2-year yield dropping nearly 10 basis points but only temporarily. By the end of the day, 2-year yields were slightly higher than just before the announcement. Over the next day or so, equity markets rallied, led by rate-sensitive sectors such as technology (due to its long-duration cash flows) and real estate, while the U.S. dollar initially weakened modestly against major currencies before quickly bouncing back. Investors expect the Fed to move faster next year than its own projections suggest. Volatility remains elevated as traders weigh incoming data against the Fed’s conflicting tone.