Notes | Pre-Fed Thoughts (Sep '25)

Edward von der Schmidt
Sep 17
4 min read

Ideas to think about going into the decision and press conference.

17 SEP 2025

EDWARD VON DER SCHMIDT

Cut and What?

The Federal Open Market Committee will set a new course for monetary policy today in Washington. Chair Powell will open day two of the September FOMC with a proposal and lead a policy discussion among participants - the Governors and regional Bank Presidents of the Federal Reserve System. After Tuesday's staff and manager presentations, scenario analysis, and assessment of financial and economic conditions, FOMC participants will formally discuss, debate, and decide the appropriate path forward for rates.

The Fed bases its decisions on the economic environment and future outlook while balancing the risks it sees to attaining its maximum employment and price stability goals. With a currently restrictive stance intended to contain inflation and keep longer-term expectations in check, the FOMC must now decide whether to resume its move toward a more neutral posture by lowering rates and by how much. In light of Chair Powell's Jackson Hole speech that addressed the shifting balance of risks, an adjustment to the federal funds target range is widely anticipated.

Though not everyone on the FOMC may be persuaded to go in September, the case for a cut soon would seem clear enough. Rates are restricting activity even as growth has appeared to falter and as payrolls data points to a precarious labor market. The Fed's base case is that tariff-related inflation will prove transitory or one-off, even if it takes some time to process. This clarity should give the Fed enough confidence to look through near-term price pressures in order to anticipate risks to employment and let up on the brakes.

Were it that simple. Trade disruptions can have unpredictable and lasting consequences. What will emerge from a refactoring of global commerce? How much of tariffs will now be passed on to consumers? Will services prices move higher in tandem with goods? How will that experience shape price level expectations? Only time will well. As Fed officials have often repeated, well-anchored inflation expectations are at the very core of the central bank's mandate. For some, only a marked deterioration in labor markets would call for easing when inflation has spent years above target and has reaccelerated.

Enter multiple challenges to the Fed's independence. Repeated second-guessing and calls for immediate, large rate cuts. Threats of investigations and firings. The appointment of a governor who will not leave the administration. The attempted dismissal of a governor whose case may end up before the Supreme Court with control of the Board at stake. The Fed's effectiveness hinges on its inflation-fighting credibility and perceived willingness to make politically unpalatable decisions in order to safeguard future economic stability. In this case, that may mean cutting rates more slowly than many would like.

If Chair Powell and the Committee intend to "proceed carefully" with easing and start with a modest 25bp cut, they will likely disappoint President Trump anyway. What then?

Here are some things I will be looking for:

The Decision

Markets have implied a 25bp cut for some time and Powell did not dispel the notion of a small adjustment. The latest payrolls data and revisions weakened the case for a hold and challenges to Fed independence only complicated matters further. If officials are more worried about labor markets than they have let on, however, then larger adjustments could be on the table instead. The potential for a surprise has clearly diminished, but it always exists until the debate is had and the outcome is known.

Perhaps more interesting than the decision itself will be dispersion on the Committee. It is possible that any outcome - a hold, 25bp cut, or 50bp cut - could bring multiple dissents.

Projections

The Summary of Economic Projections (SEP) will be released along with the meeting statement at 2pm ET. The projections will not only show the anticipated path of policy rates but reveal expectations for growth, unemployment, and inflation. How many cuts do FOMC participants envision by the end of this year and next? 50bp by December and 150bp or less of cumulative easing by year-end 2026 might disappoint dovish market expectations, to say nothing about the White House. How far do participants think we are from neutral rates? Do they expect we'll need to go through them?

Separately, how resilient will growth forecasts be? How high is unemployment expected to climb and how quickly? How long will it be before inflation is expected to return to target and how much room is there to run? The duration and degree to which the Committee expects its goals to be in tension will greatly influence their near-term policy calculus.

Guidance

The less the Fed and Chair Powell say about future policy, the more flexibility they will retain to enact it. That said, it may serve the FOMC to offer some degree of conditional guidance, perhaps at the press conference. If price pressures are projected to fade and leave employment as the Fed's primary concern, the bar to easing more quickly is lowered. If concerns about evolving price dynamics and threats to the Fed's independence resonate and labor markets are able to sustain their curious balance, the path to lower rates may be slow and uneven.

Communications

The Fed's five-year review included its communications strategy. Will there be any changes to the SEP debuted today and will any formalized scenario analysis be offered? Were any adjustments to the press conference format considered?

Independence

Chair Powell will avoid commenting directly on legal matters or his future at the Fed. Will he offer any words in defense of his colleagues or institutional independence?

How much patience does the administration have left for not getting exactly what it wants?