Despite First US Rate Cut of the Year, Powell's Caution Leaves Wall Street Saying "Hawkish Cut, Too Soon for Pivot" (Comprehensive)

Fed Lowers Benchmark Rate to 4.0-4.25% Annually
Dot Plot Signals Two More Cuts This Year
Powell Cites "Labor Market Cooling"
Says Move Is for "Risk Management"... No Broad Support for Big Cut
Diverging Views Among Committee Members Leave Future Rate Path Uncertain

The United States Federal Reserve (Fed) lowered its benchmark interest rate on September 18 (local time) for the first time this year. Fed Chair Jerome Powell made it clear that the background for this rate cut was a slowdown in employment, stating, "The labor market is truly cooling." The Fed also left open the possibility of two additional rate cuts within the year.

However, Chair Powell described this move as a "risk management cut," signaling caution regarding consecutive further cuts. Only one committee member advocated for a "big cut" (a 0.5 percentage point rate reduction), and opinions among committee members were divided over the number of additional cuts within the year. As a result, the market interpreted this rate decision as not yet signaling the start of a full-fledged monetary easing cycle. With Powell's remarks considered more hawkish (favoring monetary tightening) than expected, the New York stock market closed mixed.

US Fed Cuts Rate by 0.25 Percentage Points, Signals Two More Cuts This Year... Trump Advisor Pushes for "Big Cut"

In a statement released immediately after the Federal Open Market Committee (FOMC) regular meeting, the Fed announced its decision to lower the federal funds rate by 0.25 percentage points to a range of 4.0% to 4.25% per year. This marks the first rate cut since December of last year, following a nine-month freeze. It is also the first rate cut since President Donald Trump took office in January this year. As a result, the gap between the benchmark interest rates of South Korea and the United States has narrowed to 1.75 percentage points at the upper end.

In its policy statement, the Fed noted that "economic activity growth slowed in the first half of the year" and newly added that "job gains have slowed." While acknowledging that "inflation has increased and remains somewhat elevated," the committee stated, "We are paying attention to risks on both sides of our dual mandate (price stability and full employment), and we judge that downside risks to employment have increased." The Fed thus presented the slowdown in employment as a direct reason for the rate cut.

Of the 12 FOMC members with voting rights, 11 supported the decision. Only Stephen Myron, the "Trump economic advisor" attending for the first time, voted against, advocating for a big cut as expected. Vice Chair Michelle Bowman and Governor Christopher Waller, who had opposed holding rates steady at the July meeting and were expected to support a big cut, agreed with the majority this time.

Regarding the outlook for future rates, the Fed indicated the possibility of two additional 0.25 percentage point cuts at the October and December meetings this year. This is one more cut than projected in the June dot plot. Cuts of 0.25 percentage points each are also expected in 2026 and 2027. While the market had forecast two or three rate cuts next year, the Fed's projection is for just one. In its Summary of Economic Projections (SEP), the Fed raised its forecast for this year's GDP growth from 1.4% to 1.6%, maintained the year-end unemployment rate at 4.5%, and kept the core personal consumption expenditures (PCE) inflation forecast at 3.1%.

Powell Describes Cut as "Risk Management" Move... Wall Street Says "Pivot Not Yet" as Rate Path Remains Uncertain

At a press conference following the FOMC meeting, Chair Powell stated, "Labor demand has weakened, and the recent pace of job creation is not sufficient to keep the unemployment rate steady," adding, "It is hard to say the labor market remains very robust." He emphasized, "With the slowdown in employment and growth, inflation risks have diminished more than expected, and now downside risks to employment have increased."

On inflation, he observed, "Tariff burdens have been absorbed mainly by importers, and the pass-through to consumers has been smaller and slower than expected." However, he warned that if companies accelerate the pace of passing on costs, inflationary pressures could rise.

The most notable point in the press conference was Powell's description of the cut as a "risk management" move. The market interpreted this as somewhat hawkish, seeing it as a preemptive measure with a strong insurance character against a recession. He stated, "There is no risk-free path now, and it is not clear what we should do." He also confirmed that there was not broad support for a big cut.

Wall Street analysts noted uncertainty over whether the Fed will proceed with consecutive rate cuts. Daniel Siluk, Global Head of Short Duration and Liquidity and Portfolio Manager at Janus Henderson Investors, said, "The dot plot suggested two more cuts this year, but Powell downplayed that significance," adding, "He described the outlook as 'more balanced' rather than decisively tilted toward labor market risks. While the market may welcome a dovish stance, this message remains nuanced and is still far from a full pivot (policy shift)."

The Fed's dot plot also showed expectations for two more cuts this year, but there were significant differences among committee members. Of the 19 FOMC members, seven saw no need for further cuts this year, two supported one more cut (0.25 percentage points), and nine supported two more cuts (0.5 percentage points). One member, presumed to be Myron, advocated a total of 1.25 percentage points in additional cuts this year. With such divided opinions, discussions about the future rate path are expected to be intense.

Wall Street believes that upcoming employment and inflation data will be key variables determining the pace of rate cuts. Gina Bolvin, President of Bolvin Wealth Management Group, said, "The Fed's 0.25 percentage point cut is a cautious move, not a pivot," adding, "Upcoming inflation and employment data will determine the Fed's next steps."

The New York stock market closed mixed. The Dow Jones Industrial Average rose 0.57%, while the S&P 500 and Nasdaq indices fell by 0.1% and 0.33%, respectively. Treasury yields increased, with the 10-year note rising 6 basis points to 4.08% and the 2-year note up 4 basis points to 3.55% compared to the previous day.