Amid the political melee, it’s easy to forget that there actually is a genuine (i.e., almost apolitical) policy debate to be had at the September FOMC meeting.
It’s fairly obvious that Chris Waller, Miki Bowman and I aren’t on the same page politically, but from a monetary policy perspective, I was in the “cut in July” camp just like they were.
The setup for that meeting (the July gathering) was eerily similar to the conditions which prevailed a year previous, and wouldn’t you know it, history rhymed: The Fed decided not to cut preemptively and the US labor market promptly delivered a growth scare.
Just like last year, that sequence — a missed opportunity to cut rates proactively followed by a sharp slowdown in hiring — raised the specter of an upsized, 50bps cut at the September policy meeting.
It’s well nigh impossible to separate the 25bps versus 50bps debate from the above-mentioned political soap opera. I covered the politics around this week’s meeting here. You should read that piece if you missed it because the “weirdness” surrounding the September 16-17 policy gathering is in no small part a function of the political chess match.
Consensus still expects a quarter-point cut and I suppose that’s the most likely outcome on Wednesday. But the odds of a larger move are, I suspect, higher than many market participants are willing to concede. In fact, I’d argue (and I did argue last week) that 50bps might be a kind of “shadow consensus.” And that a mere 25bps cut could be seen as a disappointment.
The 2025 dot in the SEP will be a close call if the Fed opts for 25bps this week. Traders have all but fully-priced 75bps of cuts across this year’s remaining three policy meetings. If the 2025 dot’s marked to market, next month’s policy gathering becomes something close to a lock — because 25, skip, 50 is a somewhat off-beat cadence, although a lot plainly depends on the next jobs report (and the accompanying revisions).
More interesting, I think, is the 2026 marker. Traders now expect a rapid return to neutral, a reflection of i) the Trump-friendly shift on the Fed Board, ii) Jerome Powell’s exit as Chair (and, likely, as a governor) in May and iii) slower growth and hiring. As the figure below shows, such expectations are at demonstrable odds with the median 2026 dot.
The long run dot’s still 3%. So, it’s not that the market disagrees with the Fed on where rates will settle once the cutting’s done, it’s a matter of how quickly rates will get there.
“Within the September SEP, it will be interesting to see the extent to which the Fed is willing to mark-to-market the dot plot given the magnitude of the difference between the market’s pricing and the Fed’s June dots,” BMO’s Ian Lyngen and Vail Hartman said. “Moreover, as the debate shifts from the pace of rate cuts to the ultimate terminal rate for the next stage of the cycle, we anticipate that investors will soon refocus on the risk that the Fed needs to go beyond simply returning to neutral and eventually shift into an accommodative stance — a risk that we’ll argue is currently underpriced.”
Do note: Following the September 2024 FOMC meeting, the 2026 dot and the long run dot were the same: 2.9%. So, this time last year the Fed expected a return to neutral by year-end 2026. That was pushed out starting in December. The June 2025 SEP suggested Fed funds would be even further north of neutral (i.e., more restrictive) at the end of next year.
That disparity — between traders’ expectations for the timing of normalization and the Fed’s “median” projection — is untenable and given inter-meeting political developments as well as a series of misses across the spectrum of US labor market data, I’d expect it to be resolved this week. The median 2026 dot will almost surely be revised to reflect the complete removal of policy restriction over the course of next year.
As for the rest of the SEP, the unemployment rate projections still look pretty realistic at 4.5% for this year and next. The core PCE projections, at 3.1% for this year and 2.4% for 2026 are reasonable enough that they won’t likely see dramatic shifts. The growth outlook for this year could get bumped up, while the out-year projections will probably stay more or less where they are.
All of this is playing out with “animal spirits” raging in the stock market, where expectations for 150bps of Fed easing over 16 months are helping fuel the fire which produced nearly two-dozen new S&P records over the summer. At the same time, gold’s 38% YTD return is a clarion call for policymakers in the developed world, both monetary and fiscal.
The press conference on Wednesday will be very difficult for Powell. He’ll try to stick to the macro-policy discussion but that’ll prove impossible. He’s being sued by one of his own governors, after all. Remember: Powell’s a co-defendant of Trump’s in Lisa Cook’s lawsuit, not because Powell did anything wrong, but rather because, in his role as Fed Chair, he might have the “ability to take action to effectuate” what Cook alleges is an illegal firing.
