The Breakdown - Fed Cuts Rates Amid Rising Labor Market Risks

Episode Date: September 19, 2025

The Federal Reserve delivered its first rate cut since last November, reducing the target range to 4–4.25% as weakening labor data outweighed inflation concerns. Chair Powell framed the move as a ��risk management cut” and an adjustment toward neutral, while politics loomed large with Trump-aligned voices pushing for deeper cuts. Markets and analysts were left uncertain about whether this is the start of an easing cycle or simply a preemptive move in a bifurcated economy driven by AI investment on one side and labor market softness on the other.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, September 18th, and today it is, of course, Fed Day, or Fed Day plus one, but you get it, where we explore Fed Day. Anyways, before we get into that, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit. Y slash breakdown pod. Yesterday, the long-awaited rate cut finally happened. The FOMC meeting concluded with the approval of a single cut, reducing the target range to between

4 and 4.25%. This is the first rate cut since the November meeting last year. That mini-cutting cycle came to an abrupt halt as the stock market ripped following the election of Donald Trump. Since then, the Fed has been paralyzed, first by a lack of clarity on what the administration's policies would look like, then due to waiting for a tariff-induced, inflation spike that never truly arrived. Heading into this meeting, the weakening labor market was the dominant consideration.

The Bureau of Labor Statistics revised away almost a million jobs from the payroll data in the annual revision last month. Jobs numbers have been tepid over the past four months, including a negative print in June, which was the first since the pandemic. Delivering his assessment of the situation, Powell said, In this less dynamic and somewhat softer labor market, the downside risks appear to have risen. On inflation, Powell noted that although recent numbers are, quote, somewhat elevated, long-term expectations remain well anchored. The FOMC's base case is still that tariffs will cause a

one-time price shock as they flow through the economy. Powell summarized, in the near term, risks to inflation are tilted to the upside and risks to employment to the downside, a challenging situation. When our goals are intention like this, our framework calls for us to balance both sides of our dual mandate. Accelerating downside risks in the labor market were judged as more concerning than the risk of rising inflation, justifying the decision to cut. Interestingly, Powell framed the cut as a decision to bring interest rates closer to neutral. That made the decision feel like it was a fine-tuned adjustment rather than a reaction to major problems showing up in the economy.

Nick Timrose of the Wall Street Journal pointedly asked whether current economic conditions no longer warrant restrictive policy. Powell answered, I don't think we can say that. What we can say is that over the course of this year, we've kept our policy at a restrictive level. We were able to do that over the course of this year because the labor market was in very solid condition.

He noted that due to the revised labor statistics, I can no longer say that. Powell explained that the balance of risks, which were previously tilted towards inflation, have moved meaningfully towards the labor market. He commented that this shift alone was enough to justify moving closer to neutral on rates. Discussing the prospect of a 50 basis point cut in the future, Powell explained, you tend to do very large cuts at a time when you feel that policy is out of place and needs to move quickly. That's not at all what I feel right now. I think our policy has been doing the right thing so far this year. I think we were right to wait

and see how tariffs and inflation in the labor market evolved. Another member of the media noted that the median committee member is forecasting two additional rate cuts this year, despite not expecting the unemployment rate to rise. When asked to give clarity on how the committee is thinking, Powell said, I think you can think of this as a risk management cut. The projections for growth actually ticked up a little bit, and inflation and unemployment didn't really change. He explained that although the forecast hasn't changed, the balance of risks had,

so it was time to take that into consideration and setting policy. Attempting to put it all together, Powell made the point, there's no risk-free path. With inflation and unemployment both now a concern, it's, quote, not incredibly obvious what to do. Now, a big subplot for this Fed meeting was, of course, the politics of the moment. Not only has President Trump been berating Powell for months to cut rates, he also attempted to fire Governor Lisa Cook last month. Cook's dismissal was put on hold by an appeals court on Monday, so she was able to attend the meeting and vote on the rate decision.

Earlier this week, White House Economic Advisor Stephen Moran joined the Fed board, replacing Adriana Coogler who resigned at the beginning of August. The Senate had rushed through Moran's confirmation on Monday in order to allow him to attend the FOMC meeting when it began on Tuesday morning. The entire exercise seemed like a bit of a waste in retrospect. Each member of the FOMC voted for a rate cut, giving the president what he had been asking for. There was a single dissent, but it came from the newly appointed Moran. He voted for a double cut, representing the president's view that the Fed is late to the game and needs to catch up. This meeting also featured a new statement of economic projections and the dot plot showing the forward rate projection for each

FOMC member. The dots for the end of 2025 were pretty evenly split between zero or two more rate cuts to end the year. And then there was a single outlier that believed it would be appropriate to deliver five additional rate cuts at the two remaining meetings. The dot plot is anonymous, so we can't, of course, know for sure that it was Moran, but it seems pretty obvious that Trump's pick is the one calling for double rate cuts at every meeting. The political furor was the key focus for the media. Even though this was the first rate decision in almost a year, the first question was about the state of Fed independence. Powell gave a very diplomatic. answer, as he always does, welcoming Moran to the committee and stating,

we're strongly committed to maintaining our independence, and beyond that, I don't really have anything to share. Powell's only other comment on the politics of the situation was a remark about how the FOMC makes their decisions. He said, the only way for any voter to really move things around is to be incredibly persuasive, and the only way to do that in the context in which we work is to make really strong arguments based on the data and understanding of the economy. That's really all that matters, and that's how it's going to work.

One of the big questions for analysts was how to gauge the position of the committee moving forward. Both markets and the dot plot are projecting two rate cuts at the October and December meeting. Simon Dangor, the head of fixed income macro strategies at Goldman Sachs said, the majority of the FOMC is now targeting two further cuts this year, indicating that the doves on the committee are now in the driver's seat. We think it would take a significant upside surprise in inflation or labor market rebound to take the Fed off its current easing trajectory. On the other hand, this wasn't a particularly doveish performance from Powell.

he didn't deliver a lot of forward guidance for more cuts to come. Instead, he positioned the committee as a little cautious, with talk of this being a risk management cut. Dan North, chief economist at Alian's North America said, I don't think that's risk management. I think that's steering the ship. I think it's a move where we're definitely trying to manage the economy. Overall, it didn't feel like you could say one way or another whether the Fed would keep cutting. Powell positioned this as a cut design to address the shifting balance of risk, not about addressing a risk that was already manifesting in the economy. In other words, the Fed believes they are preempting a downturn. The Fed is at this point known for being chronically behind the curve, so most think that it's

pretty unlikely that they've gotten ahead on this one, but the point stands that they don't yet believe that they're responding to a crisis in the labor market, at least in so far as they'll say that out loud. Dario Perkins, director of global macro at TS-Lombard tweeted, tweeted, the Fed is more worried about the labor market than it is prepared to admit in public. Stephen Stanley, chief economist at Santander U.S., believes we're still in wait-in-C mode, with the FOMC taking their decisions meeting by meeting. He said, this doesn't feel like the beginning of an aggressive easing campaign, the kind you might see if we were heading into recession. The path is going to be very much dependent on how the economy plays out from here.

To compound this theory, no one on the FOMC believes they will be cutting deep into next year. After two cuts to end this year, the median of the dot plot had just one cut next year, and another cut the year after to bring rates in for a soft landing at 3%. Now, the CEP never predicts recession. Still, a 3% neutral rate implies a relatively hawkish longer-term view. Several commentators noted that the dot plot was all over the place for the end of the year. Removing two outliers, there are currently five committee members who expect no more cuts, nine who expect two more cuts and a pair of FOMC members in the middle at one more cut. Former White House Economic Advisor Jason Furman wrote, avoiding group think is great, but I really

hope that all of those dots, including that outlier at the bottom calling for five cuts at the next two meetings, reflects independent thought and not orders. Jim Bianco commented, this meeting was a mess. The FOMC is showing little to no agreement on what they should do, yet it was an 11-to-one vote. this rigging of the voting to create the illusion of consensus, and then publishing a wide dot plot like this only serves to undermine their credibility even further. Add to this is Powell using the term risk management to describe this cut. If this is the case now, then the Fed cannot also be data dependent. Both cannot be true at the same time. So how are they making these risk management policy decisions? I fear that a risk management cut is a political decision. He wants to get Trump

off his back. Has the Fed voluntarily given up its independence? Trump is not doing it to the Fed, they are doing it to themselves. Joseph Rusuelas, the chief economist at RSM, made the point that Trump could replace the entire cohort of regional Fed presidents as well as the chair next year. He commented, given the coming changes to Federal Reserve personnel next year, we urge all to take this forecast with more than a grain of salt and would strongly suggest that the Federal Reserve is moving in a direction where it will tolerate inflation well above target. Double-line capital CEO, Jeffrey Gunlock, said that his two key phrases from the press conference were challenging situation and no risk-free path forward. He added, I think what really surprised the markets a little bit was when he said

that there was very little support for a 50 basis point cut. Now, if you're a little puzzled about what to make of all of that, don't worry, so is the market. Stocks ended the day down slightly while the dollar index whipsawed to end the day higher, the inverse of what many were expecting to see after rate cuts. Bitcoin fell all morning into the rate decision and then climbed back up after Powell was done speaking. All in all, it was a strange, volatile day that spoke to deep confusion about how to interpret the press conference. S&P 500 futures rose overnight with Karen Georgia's an equity fund manager at EcoFi and Paris commenting, last night the market was taking the view that this wasn't so much of a doveish cut,

but after sleeping on it, it decided that it was enough to keep the market going. Fed cuts are good for tech and long-duration stocks. A lot of analysts were paying attention to the bond market, which had an equally confused reaction. Rates right along the yield curve ticked higher throughout the day. There was a sharp drop in rates as the decision was announced, but that quickly reversed and headed higher. It wasn't a big move, but the lack of drop in yields was notable. Analyst Noel Atchison wrote, the bond market is not convinced. Now this is undoubtedly a weird economy, and the data is pointing

in all sorts of directions at the same time. Earlier this week, we got an update on the Atlanta Fed's GDP-Now figures. Their estimate jumps significantly over the past month and is now at 3.4% annualized for Q3, which is way above the blue-chip consensus. Zero hedge circulated a post at the beginning of the week, claiming that every time the Fed cuts rates with stocks near all-time highs, stocks were higher the following year. Many noted that they had cherry-picked the parameters to exclude 2007. Essentially, for many analysts, the vibes are off, and they expect to see economic weakness show up soon. Interestingly, J.P. Morgan ran with a similar statistic for their Monday research note. They said that when the Fed cuts rates with the S&P 500 within 1% of all-time highs,

the average return is up 15% over the next 12 months. Uri and Timor, the director of Global Macro at Fidelity remarked earlier on Wednesday, the fact that the Fed is about to cut rates while animal spirits are rampant, brings to mind the post-LTCM easing cycle in late 1998. The Greenspan Fed cut rates three times, even though the market was strong, and there was no recession. The rest is history, of course. The stunning rebound from the 22% drawdown in October 1998 is the only analog left to match the current recovery from the 21% tariff tantrum in April. ConnerSand, a columnist for Bloomberg, noted that we are now living in a bifurcated

economy, writing, the bond market is tracking the real economy and labor market, the stock market is tracking the AI economy. To me, this seems like one of the big factors scrambling everyone's view here. AI infrastructure investment is red-hot and still accelerating, and that's clearly driving the stock market higher. If you have any doubts of that, just take a look at the Oracle chart after last week's announcement. At the same time, there seems to be a good chance that labor market weakness is about to get worse. But in an economy driven by pouring concrete and putting GPUs on server racks, stocks can continue to fly as the labor market weakens. That bifurcation is definitely going to make the Fed's job harder over the next six months, and it could

scramble the signal from economic data beyond recognition. The Fed is going to have to make some tough decisions, and as Powell said, there is no risk-free path forward. That, friends, is going to do it for today's breakdown. Appreciate you listening, as always, and until next time, be safe and take care of each other. Peace.