The Fed Just Trimmed Rates. But Don’t Get Too Excited.

Federal Reserve Chair Jerome Powell acknowledged that policymakers lacked conviction in their forecasts. (Kent Nishimura/Bloomberg)

Key Points

About This Summary

• The Federal Reserve lowered interest rates by a quarter percentage point to a target range of 4%-4.25% due to a weakening jobs market.
• Updated forecasts reveal uncertainty among policymakers, who project three cuts in 2025, amid a softening labor market.
• Chairman Powell framed the cut as ‘risk management,’ signaling caution and data-dependence, while downplaying political pressure.

The Federal Reserve cut interest rates by a quarter percentage point Wednesday, lowering the federal-funds target range to 4%-4.25%, as a darkening jobs picture pushed policymakers to act for the first time this year.

The jobs data that prompted the move has turned increasingly worrisome. Last week the Bureau of Labor Statistics revised down payroll gains by 911,000 in the 12 months through March, revealing the economy created less than half the positions initially reported.

“Uncertainty about the economic outlook remains elevated,” the Fed said in its statement. “The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen.”

But Fed Chair Jerome Powell was equally clear about what the rate cut isn’t: the start of aggressive easing.

“You could think of this in a way as a risk management cut,” he said at his press conference, signaling that further moves would be cautious and data-dependent.

That cautious stance showed up in the Fed’s own projections.

The updated “dot plot” forecasts three cuts in 2025, up from two in June, but the outlook reveals deep uncertainty among policymakers. The median forecast masks a razor-thin 10-9 split among the 19 participants, what economists call a “soft median” that suggests little consensus about the path ahead.

“The amount of dispersion [in the dot plot] reflects the uncertainty and two-way risks in 2025’s macro environment. I think today was a job well done by the Fed in terms of delivering a cut with prudence, not panic,” said Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management.

Powell acknowledged that policymakers lacked conviction in their forecasts.

“I think right now is a particularly challenging time, even more than usual,” Powell said during Wednesday’s press conference, responding to a question asked by Barron’s. “Ask any of the forecasters whether they have great confidence in their forecast, I think they’ll honestly say [they aren’t confident].”

Markets seemed to get the message. Stocks wavered after the announcement, with the S&P 500 slipping modestly as some investors read Powell’s “risk management” framing as hawkish, a signal that cuts will fall short of more aggressive market expectations.

The actual policy vote also showed unexpected alignment, with an 11-1 tally favoring the quarter-point cut and only newly-appointed Governor Stephen Miran, one of President Donald Trump’s most senior economic advisors, pushing for a larger move. Markets had expected a more dovish dissent.

“The Fed put more weight on softening labor market conditions than tariff-related inflation risk,” said Niladri ‘Neel’ Mukherjee, TIAA Wealth Management’s chief investment officer. “This was a risk management cut, with the Fed attempting to move toward neutral from a restrictive policy stance, as the risk to the labor market has increased.”

Powell also reinforced on Wednesday the central bank wouldn’t be swayed by political pressure.

“We are doing our work exactly how we always have now,” he said. “People are having their arguments, and we’re having a great discussion about these issues.”

The Fed now finds itself in a precarious position, cutting rates into a slowing labor market while inflation remains above its 2% target. Wednesday’s move underscores just how narrow the path forward has become.

Write to Nicole Goodkind at nicole.goodkind@barrons.com