The Fed Delivers – and Still Disappoints
The Fed cuts rates by a quarter point… why Louis is disappointed with the dot plot… markets aren’t sure what to make of today… Louis’ take on how to fix things… where we go from here
VIEW IN BROWSER
The Federal Reserve finally pulled the trigger today, delivering the widely expected quarter-point cut in interest rates.
That lowers the target range for the federal funds rate from 4.25%-4.50% to 4.00%-4.25%.
It’s the first cut of 2025 and the clearest sign yet that the Fed is shifting to a new phase of gradual easing.
On its own, the cut was no surprise. Markets had been pricing in the move for months. Investors really cared about three other things:
- The message behind the cut
- The updated dot plot for future cuts and the Fed’s economic projections
- And Federal Reserve Chairman Jerome Powell’s tone in the post-meeting press conference.
Powell and the Fed tried to thread a different kind of needle today – one where both sides of the dual mandate are facing challenges
Beginning with the message behind the cut, Powell himself called today a “risk management cut.”
While acknowledging that inflation has climbed modestly in recent reports, Powell suggested the balance of risks has begun to tilt more toward protecting jobs than toward fighting inflation.
That language was echoed in the official FOMC statement:
The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen.
Eleven of 12 Fed voters supported the quarter-point cut. The newest Fed governor, Stephen Miran, was the lone dissenter, voting for a half-point cut.
Turning to the dot plot – the Fed’s chart of each official’s view of where rates will be – the median projection now suggests roughly two more quarter-point cuts by the end of the year.
But the big story is how inconsistent the rate-cut forecasts were.
For this, let’s go to legendary investor Louis Navellier and his Special Market Update in Growth Investor:
The disappointing thing is the dot plot was really all over the place.
Six members said they didn’t want to cut. One member said they shouldn’t have cut today – so that was a super hawk. And then two members said there should be one additional rate cut this year.
So, the hawks are in charge. So, treasury bond yields have firmed up and the dollar has also firmed up because of high rates – so the Fed is worried about unemployment but they’re not doing a lot about it.
Alongside the dots came new economic projections.
Here’s Yahoo! Finance with specifics:
Inflation is now seen rising 3.1%, the same as the previous estimate, while GDP was upgraded to 1.6% versus a 1.4% prediction made in June.
The unemployment rate is seen ticking up to 4.5% compared with the same estimate in June. The unemployment rate currently stands at 4.3%.
At the press conference, Powell’s tone was relatively neutral – with a slight dovish tilt
He acknowledged that inflation is still running above target and has ticked higher in recent months, but he put more emphasis on the cooling labor market and rising unemployment risks.
Overall, he presented a mostly balanced tone. While the cut itself was dovish, and the dot plot was mildly hawkish (relative to what bulls had wanted), Powell’s tone largely threaded the needle, though the edge goes to “dovish” because we’re now cutting rates again.
Here are select quotes or paraphrases from Powell during his press conference:
- He anticipates the effects of inflation on goods prices “to continue to build” into 2026
- That said, he also noted “The case for there being a persistent inflation outbreak is less”
- Tariffs have mostly been absorbed by companies in the supply chain, so consumers haven’t seen major price increases yet – but companies are expected to raise prices
- “The labor market is softening, and we don’t need it to soften anymore (and) don’t want it to”
- Powell said today brings a “very different picture” of labor market risks, noting it is “really cooling off”
- About the varied dot plot, Powell said “not surprising to me you have a range of views”
- Looking forward, Powell said “There is no risk-free path… It is quite a difficult situation for policymakers.”
Markets seemed unsure what to make of it all
Stocks were mixed in the wake of the news with the Dow up about 0.50%, the S&P flat, and the Nasdaq down modestly.
To Louis’ point, the 10-year Treasury yield climbed to 4.076%, and the dollar edged up about 0.3%.
Overall, it’s a muted response that seems to reflect a market that isn’t quite sure what to do given the variance in the dot plot.
This puts more weight on the incoming data…
The next CPI and PCE prints will be make-or-break for the market’s bullish case. If inflation keeps moving higher, Powell’s new job-protecting tilt could run into trouble.
But if inflation comes down – or just remains steady – while jobs show only measured deterioration, the Fed will likely deliver the additional cuts sketched in the dot plot.
Of course, the drama surrounding President Trump’s tariffs and how the Supreme Court will rule about their legality is not yet resolved. But we cannot predict that outcome today.
Circling back to Louis, he thinks the Fed dropped the ball – in large part due to how they’re handling the housing market
Let’s return to his Special Market Update:
Here’s the problem folks – everybody’s discounting homes. There are layoffs in the construction industry in the last four months. So, this is part of the unemployment problem.
So, cut rates, get everybody buying homes again, and fix this part of the economy.
But they’re not doing that. They are ostriches with their head in the sand, and they are oblivious to what’s going on.
Housing is a topic that deserves a deeper dive than we have room for in today’s Digest, so we’ll circle back in the coming days for more.
For now, here’s Louis’ bottom line:
It is what it is – we have a hawkish Fed. And the Fed is basically an ostrich.
I am very disappointed in the FOMC dot plot.
But I think as unemployment continues to sputter, they’ll continue to cut. And they should cut at least three more times in my opinion.
Where does this leave us?
While today marks the start of a new cutting cycle, the market didn’t exactly usher it in with trumpets and fanfare. Instead, it feels more like a conditional cycle – only if the data cooperate.
For investors, yes, the near-term backdrop is supportive – cheaper borrowing costs and an intention by the Fed to cushion the labor market – but to Louis’ point, the overall feel of today’s rate-cut wasn’t as dovish as many had hoped it would be.
We’ll report back with the perspectives of our other analysts later this week.
Have a good evening,
Jeff Remsburg
The post The Fed Delivers – and Still Disappoints appeared first on InvestorPlace.
