Fed Delivers Dovish Pivot

Fed Lowers Rates Amid Strong Growth

In a widely anticipated move, the Federal Reserve cut its benchmark interest rate by 25 basis points to a range of 4.00%–4.25% at the conclusion of its Sept. 17 FOMC meeting, marking the first cut in nine months. The Committee vote highlights a dovish tilt with one member opposed to any cut, one dissented for a 50-basis-point cut, six preferred no further cuts, nine supported two additional cuts, and one favored five more cuts. The Fed lowering rates in the face of strong economic growth, additionally proved bullish as the majority of the Fed is inclined toward additional easing.

The Fed’s move signals a departure from the restrictive policies of recent years and introduces a new phase that could reinvigorate rate-sensitive sectors such as housing, automotive, and consumer lending. The Fed’s move now points to a median federal funds rate of 3.6% by year-end, lower than the 3.9% projected in June. Chair Jerome Powell emphasized a cautious, data-driven approach, stressing that policy decisions remain independent and not political. Importantly, the cut was framed as a risk management decision rather than a sign of urgent weakness, reinforcing the Fed’s intent to support the expansion while guarding against emerging downside risks.

Chart 1: Fed Dot Plot¹

Inflation, Unemployment, and Shifting

Powell underscored that the Fed remains fully committed to its dual mandate of price stability and maximum employment. However, he acknowledged that the balance of risks has shifted. Inflation remains “somewhat elevated,” with median PCE projected at 3.1% in 2025, falling to 2.6% in 2026 and gradually aligning with the 2% target. Tariffs are contributing to higher goods prices, but much of the burden is being absorbed by firms, and the Fed views this as a one-time effect rather than a persistent inflationary driver.

Meanwhile, labor market conditions are softening. Job gains are slowing, and unemployment has begun edging higher. Wage growth is moderating, though it remains above inflation. Both labor supply and demand are softening, with immigration slowing and job creation dipping below breakeven. The Fed projects unemployment to reach 4.4% in 2026 before gradually declining. Against this backdrop, Powell made clear that the downside risk from rising unemployment now outweighs the risk of persistent inflation, and this rate drop serves as risk management geared toward preventing labor market deterioration.

Market Performance and Volatility

Despite the dovish rate cut, the S&P 500 traded flat following the announcement. Investors are weighing the bullish implications of Fed easing against the reality that the index has already surged 32% from its April 8th lows, leaving much of the good news priced in. September is historically the most volatile month, averaging a 2% decline, but we view any near-term volatility as an opportunity to buy into weakness.

GDP growth, which expanded 2.5% last year, is expected to moderate to about 1.5% this year. Business investment, however, continues to pick up, led by AI-related infrastructure buildout, while consumer demand remains narrow but stronger than anticipated. Housing remains the weakest sector, with affordability challenges and mortgage rates still serving as a key channel for Fed policy transmission. These crosscurrents reinforce why the Fed is leaning into a risk management strategy, providing support while conditions remain resilient but vulnerable to further downside.

Global Central Bank Strength

The Fed’s dovish pivot is being reinforced by central banks abroad. Europe and China are also easing policy, and their stock markets are reflecting the improving backdrop. The Euro STOXX 50 Index has climbed approximately 10.88% year-to-date, while the Shanghai Composite Index has advanced about 17.44% year-to-date.² This synchronized global policy support is an additional tailwind for risk assets, adding conviction to the bullish case.

Fed Independence

The Fed’s risk-managed cut, combined with its recognition that the downside risk to employment now outweighs inflation, marks a turning point in policy emphasis while staying true to its dual mandate. With inflation risks easing, unemployment emerging as the Fed’s key focus, and global central banks aligned in easing policy, the overall backdrop remains constructive for equities. While near-term volatility is likely, the setup for a broad-based year-end rally remains intact, offering investors opportunities to lean into pullbacks and position for strength into 2026.

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Sources:

¹Bloomberg, As of September 2025

²Bloomberg, as of September 2025

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