In this article, we’ll look at why traders are so certain about the Federal Reserve’s (the “Fed”) next move. We’ll also explain why the future beyond October’s meeting is anything but fixed.
The September Backstory
The Fed normally cuts rates when the economy is weak and inflation is low. Currently, the economy is growing and inflation remains elevated. Yet, September’s decision to cut rates was unanimous.[2]
In his official statement, Chairman Jerome Powell framed the move as ‘insurance’ - i.e., an attempt to stave off what may well be a coming recession.
The initial press release[3], and subsequently published minutes[4], show that the fears about a recession are based squarely on the weakening job market. Net new hires have been on the decline for some months (as shown in the graph below), with the August figures at 22,000, some way below the expected 75,000.[5]
Change in Employees, Total Nonfarm, Thousands of Persons
On September 5th, a shock downward revision revealed that 911,000 fewer jobs had been created in the 12 months leading up to March 2025 than had previously been reported.[6]
Building on his warning at Jackson Hole,[7] Chairman Powell articulated in a speech on October 14th that the economy is more fragile than the growth figures would suggest.[8] A “low-hiring, low-firing” environment resembles a game of musical chairs - if the music stops (sudden, significant layoffs) many could be left without new jobs to go to.
A House Divided
The latest “dot plot” contained in the revised Fed projections suggests one further rate cut for 2025. The individual projections, however, are widely dispersed, particularly in the long-run, with estimates of the neutral rate ranging from 2.6% to 3.9%.[9] A narrow majority (10) pencilled in at least two more cuts this year, while a substantial minority (5) saw no reason for further cuts.[10]
Why the growing divide? The ‘hawkish’ faction can point to stubborn inflation - which has remained above target for 4 years and has been slowly inching back upwards this year - in addition to GDP growth, robust consumer spending[11] and a booming stock market.
The ‘dovish’ faction can point to the ‘jobs recession’ apparent in the employment figures outlined above, and assert that inflation alone is a preferable scenario to stagflation (inflation plus recession). Therefore purchasing recession insurance at the cost of heightened inflation is a reasonable trade.
The Schrödinger Parallel
Chairman Powell has to contend not only with a lack of consensus among his committee members, but also a data blackout owing to a shutdown of the relevant federal agencies. Neither the latest employment (BLS) or inflation figures (BEA) have been released on their scheduled dates.
In his press conference remarks in September, he adapted a famous Churchillian political jab for the occasion, saying, ‘Forecasters are a humble lot, with much to be humble about’. All the historic data in the world cannot produce a reliable forecast, especially when dealing with something as complex as the economy.
The divided views of the Federal committee signal the genuine fork in the road at which the US economy finds itself. Like Schrodinger’s cat, both scenarios are equally real, and require us as investors to plan for both.
[1] Federal Reserve Bank of St. Louis
