As widely expected, the U.S. Federal Reserve cut the policy rate by 25bp to 3.75%—its third consecutive reduction—while signaling a limited appetite for further cuts. A rare 9–3 split vote and cautious guidance underscore a Fed that remains firmly data‑dependent, balancing persistent inflation risks against emerging signs of labor‑market softness.

Decision at a glance

  • Cut: 25bp to 3.75%, third consecutive meeting.
  • Vote: 9–3; two officials preferred no change, one favored a deeper 50bp cut—the first triple dissent in six years.
  • Statement shift: Subtle edits point to greater uncertainty around the timing of the next move.
  • Rationale: With tariff‑driven inflation viewed as temporary, today’s cut looks precautionary amid labor‑market softening.

Why the split: the data is messy

Conflicting signals—compounded by delays and cancellations of certain releases—have made policy calibration unusually difficult. This helps explain why the Committee has not delivered a unanimous vote since June. While core inflation has cooled, tightness persists in segments of the labor market; conversely, hiring momentum and hours worked have moderated.

Guidance and statement nuances

The statement tilts toward patience. The Committee emphasized that future adjustments will depend on incoming data, the evolving outlook, and the balance of risks. In practice, that means the timing of the next move is uncertain and conditional on whether inflation progress resumes without an undue hit to employment.

Projections and policy path

  • Terminal rate: Median projection implies just one additional cut in 2026, bringing the terminal rate to 3.50%.
  • Versus markets: That’s one fewer than is currently priced, but broadly aligned with our expectations.
  • Macro outlook: Quarterly projections show a higher median growth forecast and a slightly lower inflation path for this year and next.

Market implications

Rates

  • Front‑end yields may consolidate as the Fed pushes back against aggressive easing timelines.
  • Curve dynamics hinge on whether labor data weakens further without inflation re‑accelerating.

Equities

  • Quality and cash‑flow resilience remain preferred while earnings adjust to slower growth.
  • Rate‑sensitive sectors could benefit if real yields decline steadily.

Credit

  • IG spreads remain anchored; HY is more sensitive to labor‑market deterioration.
  • Maintain selectivity in lower‑quality issuers while financing costs stay elevated.

FX

  • The policy path gap vs. global peers is modest; a data‑led drift rather than a trend break in USD looks likely near term.

What to watch next

  • Labor: payrolls, hours worked, claims, and wage momentum.
  • Inflation: core PCE breadth and shelter normalization.
  • Policy noise: tariff impacts, data quality, and commentary from FOMC officials.

Bottom line

Today’s action reflects a cautious, data‑driven Fed: easing at the margin to insure against labor softness while guarding against an inflation relapse. We expect the pace and timing of any additional easing to remain contingent on the quality of incoming data.