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The United States (US) Federal Reserve (Fed) entered its September meeting under the weight of conflicting realities. On one side, US inflation remains above the Fed’s two percent target and shows a stubbornness that frustrates policymakers. On the other, the US labour market, once resilient to tightening, has begun to reveal cracks. Wednesday’s decision to lower the federal funds rate by 25 basis points was shaped by that uneasy balance. Fed Chair Jerome Powell called it “risk management,” a phrase that distils the Fed’s dilemma into two words.
Employment vs inflation
The cut did not signify a bold charge into a new easing cycle. It was a cautious adjustment, framed as a hedge against the possibility that labour market deterioration will gain momentum. Recent data points to slower job creation, rising unemployment among more vulnerable groups, and a thinning cushion of excess demand for labour. For the central bank mandated to maintain maximum employment and price stability, the calculus is no longer straightforward. Inflation risks have not evaporated, yet the cost of inaction – letting employment erode – has grown heavier.
Inflation complicates the picture further. Headline measures hover around three percent, reflecting both lingering wage pressures and the stickiness of shelter (housing) costs. The Fed cannot declare victory, nor can it dismiss the threat of new price impulses from tariffs or supply bottlenecks. Powell acknowledged that inflation remains above comfort levels, but the committee judged that allowing the labour market to weaken unchecked carries a greater long-term danger. The decision marked a subtle pivot: not abandoning the fight against inflation but accepting that the fight cannot be waged at the expense of jobs.
Dissent in the vote
Within the committee, unanimity did not hold. Stephen Miran, one of the newest governors and a close ally of the White House, dissented, favouring a deeper cut of 50 basis points. His objection speaks to a broader debate within the institution – whether the Fed risks acting too timidly in the face of a softening economy. Miran’s position suggests that he sees sharper deterioration ahead, and that a more forceful response now might forestall a harsher reckoning later. His dissent does not yet represent a majority view, but it signals a fracture in the consensus.
Market reaction
The market reaction was measured. Treasury yields fell modestly, equities inched higher, and the dollar steadied after an initial dip. Investors read the move as the first step in a sequence: the Fed’s own projections show two more cuts pencilled in before year-end. Yet Powell resisted any suggestion of a pre-set path. He reiterated that decisions would remain tied to incoming data, not to a script, and that the Fed’s ambiguity is intentional as the Fed is seeking flexibility at a time when forecasts are carrying little certainty.
The delicate balancing act
The road forward is littered with potential obstacles. If inflation plateaus above three percent, pressure will mount on the Fed to pause further easing. Should energy prices flare, or tariff effects push up inflation on consumer and manufacturing goods, the central bank may find itself caught between its two mandates once more. Conversely, if unemployment accelerates and wage growth stalls, the voices calling for faster cuts will grow louder, with Miran’s dissent gaining traction. Either of these outcomes risk unsettling the markets which crave clarity.
Beyond data, the Fed’s credibility also hangs in the balance. The Fed spent the better part of two years convincing the public that it would do what was necessary to bring inflation back to target. Retreating too soon risks undermining that commitment. Yet acting too late could result in serious long-term harm to the labour market. Powell’s language of risk management reflects this balancing act.
Impact on businesses and households
For businesses, investors, and households, the implications are complex. Lower borrowing costs offer relief to leveraged firms and households burdened by credit, but only if inflation expectations remain anchored. Equity markets may cheer the prospect of easier policy, yet any perception that inflation is slipping out of control and that stagflation is edging closer to reality, could reverse those gains quickly. Currency markets, sensitive to interest rate differentials, will continue to weigh the stance by central banks, and in particular the Fed.
The cost of miscalculation
The pressing question in this debate is whether the Fed can guide the economy through a corridor narrow enough to restore price stability without triggering a steep rise in unemployment. History offers few clear road maps. Policy operates with lags, and the full effect of past tightening is still working through the system. While the Fed does not want to underestimate the persistence of inflation, it also does not want to overestimate the resilience of the labour market, because a miscalculation could prove costly.
The months ahead will test the credibility of the Fed’s approach. Each data release – jobs, inflation, spending – will carry more weight than usual. Each speech from policymakers will be deconstructed for clues about internal divisions, and markets will remain sensitive to every sign of acceleration or slowdown.
For now, the Fed has chosen to move, modestly, in the direction of support for the labour market, while reminding the world that inflation remains a formidable adversary. Wednesday’s cut was less an answer than an admission: the questions facing monetary policy decisions are getting harder, and the margin for error has grown smaller.
A LOOK AT THE MARKETS
Bonds
In the US, the 10-year Treasury yield climbed back to 4.1% on Thursday, rebounding from the five-month low it touched after the Fed’s latest rate decision. The Fed trimmed rates by 25 basis points and hinted at two additional cuts this year, yet its forecasts also showed firmer inflation and a more resilient economy. Fed Chair Jerome Powell cautioned that the single move should not be read as the start of a rapid easing cycle. Better-than-expected jobless claims and a strong Philadelphia Fed survey added to the sense of economic durability, putting pressure on US Treasuries. The US central bank also kept its balance sheet reduction in place, even as its overnight reverse repo facility has shrunk markedly.
In the United Kingdom (UK), gilts swung before settling near 4.62%. The Bank of England (BoE) left its policy rate at 4% by a 7-to-2 vote and slowed its quantitative tightening program, reducing the annual gilt runoff to £70 billion, down from £100 billion. The adjustment followed recent stress at the long end of the curve, compounded by fiscal concerns and heavy supply expectations.
German bund yields eased toward 2.66%, as the Fed’s cautious message underscored the European Central Bank’s (ECB’s) own reluctance to press ahead with cuts. Officials in Europe continue to flag risks from tariffs, food and services inflation, and fiscal uncertainty.
Equities
Equity futures pointed modestly higher in early hours of trade this morning, extending the rally that had already pushed the three main US indices to fresh peaks in the previous session. On Thursday the Dow edged up 0.27%, the S&P 500 advanced 0.48%, and the Nasdaq gained 0.94%, with technology, industrials, and communications leading the charge. Investor enthusiasm was stoked by news of a $5 billion Nvidia-Intel chip partnership, which sent Intel soaring 23% and lifted Nvidia 3.5%. Data-mining software company Palantir, cryptocurrency exchange Coinbase, and cybersecurity company CrowdStrike also posted outsized gains. The backdrop was set by the Fed’s mid-week 25-basis point cut and its guidance for two further reductions this year, while limiting 2026 expectations to just one move. With no major data or earnings due today, markets have room to consolidate.
London stocks ended in positive territory after the BoE opted to hold the Bank Rate at 4% but slowed the pace of its gilt sale programme, particularly at the long end. Currency strength supported multinationals, though retailer Next slid 3.5% despite upbeat half-year profits and sales, after cautioning on the outlook. Even so, the company declared a higher dividend.
Equities across the European continent closed higher on Thursday, driven by strength in technology and industrials. The Fed’s rate cut and guidance for this year gave support. Tech and industrials led the charge. The broad advance underscored the sector’s sensitivity to interest rate expectations and left regional benchmarks sharply higher for the session.
Commodities
Crude markets steadied, with Brent trading near $67.50/barrel after trimming earlier gains. The move came as comments from US President Donald Trump reignited pressure for cheaper energy, dampening supply fears that had lifted prices earlier in the week. Trump signalled a preference for lower oil costs rather than escalating sanctions to squeeze Russia, easing concerns over further disruption to global flows. This helped offset the impact of recent Ukrainian attacks on Russian infrastructure. At the same time, the Fed’s latest rate cut added a layer of uncertainty. While looser policy typically underpins consumption, investors are worried that the move reflects deeper cracks in the US economy, the world’s largest consumer of fuel. US stockpile figures only added to the mixed picture, because while crude inventories fell sharply on the back of strong exports, distillate holdings climbed to their highest levels since January, raising doubts about underlying demand.
Bullion slipped back to around $3,630/ounce, after hitting fresh highs earlier this week, and setting up its first weekly decline in a month – albeit marginal at the time of writing. The Fed’s policy shift, its first since December, left room for further easing but policymakers warned inflation pressures could slow the pace of cuts. Powell underscored that the adjustment was a cautious response to labour market cooling, not the start of an aggressive cycle. Even so, gold has gained nearly 39% year-to-date, bolstered by geopolitical stress and sustained central bank buying. Recent data also showed Swiss shipments to China spiked 254% in August from July.
Currencies
The US Dollar Index held steady near 97.4, consolidating after two sessions of gains as traders reassessed central bank signals. Earlier in the week, the Fed delivered a quarter-point cut and projected another half percentage point of easing before year-end, though it pencilled in only one move for 2026. Powell stressed the adjustment was primarily a risk-management measure in response to labour market strains, rather than the start of a rapid easing cycle. Support for the greenback also came from a drop in new jobless claims, which reversed the previous week’s spike.
The euro hovered near $1.18/€, slipping from four-year highs as the dollar regained ground following the Fed rate cut. ECB officials remain cautious, keeping rates unchanged for a second straight meeting and warning that risks from tariffs, food and services inflation, and fiscal imbalances remain. ECB member Isabel Schnabel urged patience, while the Governor of the National Bank of Slovakia, Peter Kazimir, said it would be “a mistake” to ignore these headwinds. Inflation in the region has eased to 2.0% in August, marginally below the flash estimate.
Sterling drifted below $1.36/£ after the BoE voted to keep rates at 4%. BoE members Swati Dhingra and Alan Taylor, again, took a dovish tone and pushed for a cut. The bank slowed its gilt sale program to £70 billion annually, shifting focus to shorter maturities. While long-term easing expectations edged higher, traders remain cautious for 2025.
*Please note that all information is at the time of writing.
Key indicators:
GBP/USD: 1.3500
GBP/EUR: 1.1470
GBP/ZAR: 23.41
BRENT CRUDE: $67.42
GOLD: $3,652.21
Sources: Refinitiv, Bloomberg, LSEG Workspace, Trading Economics and Trading View.
Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.
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