The Fed’s Rate Cut Was Expected. Here’s What Not To Expect: Real Help


If you follow the financial markets, you would have seen lots of speculation about the Federal Reserve’s Federal Open Market Committee meeting on September 17, 2025. Will they or won’t they cut rates. As people now know, there was a quarter percentage point (also known as 25 basis points) interest rate cut.

What it means is still questionable.

The Push For Less

The decision was largely unanimous except for one of the Fed’s governors, Stephen Miran, who was recently appointed to his position by Donald Trump, who wanted a half percentage point cut. In the July 2025 meeting when the FOMC voted to leave interest rates unchanged, two voted for a quarter-point reduction: Governor Christopher Waller and Fed Vice Chair for Supervision Michelle Bowman.

Both were appointed by Trump, although a sudden jump to the feet accompanied by a sharp “ah-HA,” as if uncovering an obvious conspiracy, would be wrong. Last September, Bowman was the lone vote against because she thought the amount was too high at the time. The following months bore out her views. In this last meeting, Bowman and Waller both voted with the majority.

The issue for the Fed and the economy is not a united plan to suddenly cut rates by a large, fixed amount. Rather, it’s the belief on the part of the administration that a move toward lower rates is the only reasonable solution, and so to shift the makeup of the Fed for an eventual more compliant organization.

The tactics have been to publicly pressure and attack Chair Jerome Powell at various times, including the first Trump administration, and even to threaten to fire Powell, although he didn’t have legal grounds. More recently, Trump has said he wanted to fire Governor Lisa Cook for something to do with mortgages she had received, although there has yet to be a formal finding of wrongdoing.

It likely has nothing to do with the individuals outside of their usefulness in advancing a cause. Trump has a long history of moving from one tactic to another, like an ape branching between trees. The administration’s lurching one way and another with tariffs is another example.

A Precarious Position

Unfortunately, such manipulations rest on the presumption of correct certainty. In this case, that means the conviction that lower interest rates are the best thing to do for the country. It is a limited and incorrect perception of the economy.

The reason for the Fed’s tentative steps is its two primary and potentially clashing mandates — maximum sustainable employment and price stability. Put differently, the central bank is supposed to direct monetary policy, so inflation doesn’t race out of control, and the country doesn’t experience large bouts of joblessness.

This works with a triangle of considerations: employment level, inflation, and economic growth. Technically, the Fed has multiple policy tools. However, setting interest rates is ultimately the main tool to help create the desired balance. The neutral or natural rate of interest is the one that enables full sustainable employment and stable inflation. But no one knows for sure what that rate is; it can also shift at any time. If the rate is too low, the economy gets overheated with more jobs than can be sustained. If too high, the economy slows down, and employment typically drops.

The most common tradeoff is raising interest rates to slow the economy and reduce inflation or, if jobs seem in trouble, lowering interest rates to increase economic activity. At times like the present, when inflation is rising and the labor market is slowing, the dual mandates are sitting on a see-saw. Move interest rates to ground one and the other is up in the air. But reality is so much more tangled.

Dangerous Balance

“U.S. [consumer] consumption is debt-based and doesn’t seem to slow down,” Giacomo Santangelo, a senior lecturer in economics at Fordham University, told me. The result is “fake signals that the US economy is strong because of the U.S. economy. Consumption seems strong, but it’s because of debt, not because of income.”

The Fed may have seen the quarter-point interest rate cut on September 17 as necessary because the labor market is flagging. Nevertheless, it is a dangerous move because it could potentially help heat up inflation. There’s already evidence that is happening, especially as the reaction to the tariffs has finally started to filter into the greater economy. Higher cuts would likely put upward pressure on inflation.

Another issue, according to some large investment fund managers, is that investors’ concern. They are demanding higher returns because of perceived fiscal and political risk, as Reuters reported: runaway federal debt, question about the future of Medicare, and a Congress that has been unable to predictably set budgets as it is supposed to do every year.

The new sign is the yield of the 10-year Treasury Note, a critical measure for global finance and a basis for longer-term interest rates like mortgages. One of the Trump administration’s goals was to manage it down from a high of 4.79% in January to, as they wanted, below 4%. The lower figure would help stabilize debt from national borrowing at more manageable levels. Yields were moving in that direction, until the low labor numbers report in August and the Fed’s September rate cut. In a few days, rates rose from a hair over 4% to 4.13% on Friday, September 19, a rapid rise.

There is no promised outcome at the moment, and the cavalry may be riding in the wrong direction.

This article was published by Erik Sherman on 2025-09-19 23:51:00
View Original Post

Pay was added to the cart.
Your cart: $1.00 1 item
Share cartView cartContinue shopping
Shopping cart1
Pay$1.00
-
+
Subtotal
$1.00
Total
$1.00
Continue shopping
Scroll to Top