The FOMC delivered a 25bp cut to the Fed Funds rate, taking it to a target range of 4% to 4.25%. It marks the first rate cut since December 2024. The committee also projected a slightly faster rate-cutting trajectory. We believe the resumption of rate cuts could bode well for fixed income investments.

FOMC cuts and projects a slightly faster cutting trajectory

The committee voted almost unanimously, the only dissenting vote from the newest member of the committee, Governor Stephen Miran, who voted for a 50bp cut.

The Fed’s updated “dot plot” projections reflected two further additional rate cuts by year-end, a slightly faster rate cutting profile than in June (Figure 1). Nonetheless, individual projections were bifurcated with six members projecting no further rate cuts this year.

Figure 1: The Fed projected a modestly steeper rate-cutting trajectory than it did in June

The rest of the FOMC’s quarterly economic projections remained roughly consistent with its previous forecast in June. Most significantly, however, the committee’s projections for PCE and Core PCE were both revised up from 2.4% to 2.6% for 2026, potentially reflective of tariff-related risks.

Labor market conditions force the Fed’s hand

The FOMC’s official statement cited labor market conditions as the main driver of its decision to cut rates, noting “Job gains have slowed, and the unemployment rate has edged up” while also noting “downside risks to employment have risen.”

Chair Powell also referenced monthly non-farm payroll growth, which have been subject to significant downward revisions in recent months (Figure 2). The Fed appears concerned that the labor market could be close to tipping into a contraction, risking a cycle of job losses. 

Figure 2: Downward revisions to non-farm payrolls were likely a key factor in prompting the Fed to act

Tariffs may complicate the pace of the cutting cycle

The committee’s official statement continued to note that “Inflation has moved up and remains somewhat elevated”, acknowledging that core PCE, the central bank’s preferred inflation measure, is currently at 2.9% having risen since April.

Chair Powell noted tariffs have begun to impact some goods inflation components, but their full effects “remain to be seen”. He characterized risks to inflation as “on the upside.” He noted that a “reasonable base case” will be that tariffs will cause a series of “one-time” price rises but noted the committee’s job is to avoid tariffs leading to more persistent inflation.

This year, the administration’s tariffs have generated close to $100bn of excess customs revenue this year versus last year (Figure 3), echoing to us the sentiment that their full effect on the economy has not yet become fully clear.

Figure 3: Rising tariff revenues indicate that tariff impacts on inflation and the economy are yet to be fully felt

Rate cuts are back on the agenda

Although we suspect the Fed may take a cautious approach to further rate cuts, we continue to believe that, if needed the committee will be biased to “look through” tariff-related inflation over the near term, and will be more focused on keeping the labor market above water.

With rate cuts back on the agenda, we believe fixed income investors have the potential to benefit.