The Fed cut rates by 25bps this week, lowering the target range to 4–4.25 percent. The statement marked a pivot from July. Then the Fed described labour market conditions as “solid.” Now it concedes that job gains have slowed, unemployment has edged up, and inflation has “moved up and remains somewhat elevated.”
The new projections underline the shift. For 2025, GDP growth is now 1.6 percent versus 1.4 in June, PCE inflation 3.0 unchanged, core PCE 3.1 unchanged, and unemployment 4.5 unchanged. For 2026, growth is 1.8 percent versus 1.6, PCE inflation 2.6 versus 2.4, core 2.6 versus 2.4, and unemployment 4.4 versus 4.5.
We are not yet in stagflation, but this combination of weaker growth and high, sticky inflation is unusual for the Fed. What is striking is how little the projections shifted. Core PCE for 2026 is only 0.2 percentage points higher than in June, while growth is actually revised up by 0.2 percentage points. That sits oddly against the scale of the tariff shock now in play. Tariffs on imports represent at least a 4 percent price-level increase, yet in the Fed’s forecasts their impact on both inflation and growth for 2025 is almost invisible, as if tariffs did not exist. Policy rate setting follows the same cautious script. The Committee front-loaded easing: two more cuts in 2025, leaving the year near 3.6 percent, and only one in 2026, ending around 3.4 percent. That is 75bps in total, an insurance policy that is supposed to hasten the cuts now, then wait and see.
The dots tell the deeper story. In June, projections for 2026 were tightly clustered, mostly between 3.5 and 3.75 percent. By September, dispersion widened sharply — ranging from Miran’s 3 percent low to nearly 4 percent at the top. Miran had already stood out as an outlier in 2025 with a 3.0 percent call, but by 2026 he was joined by Chris Waller. Together, they now form a visible “low-rate camp” inside the Committee. This is new, and it signals that the debate over the right level of rates is no longer at the margin, but front and center.
By the time Powell’s term ends in May 2026, Miran and Waller will be much more vocal. As markets realize that they are likely to be in charge, their guidance will matter more than Powell’s. That will pull short-term interest rates lower even before the official handover.
At Macro Anchor, we fully agree with the logic of a front-loaded cut cycle as an insurance policy. But we also argue that by the end of 2026, rates should be no higher than 3 percent, and ideally closer to 2.5 percent. That view rests on two realities. First, the economy is already slowing — consistent with our income-led recession framework, where real disposable income stagnates under the weight of higher prices. Second, debt costs are becoming an additional layer of pressure. Without a faster reduction in policy rates, the burden of servicing public and private debt risks dragging growth lower still.
Only by pushing rates down toward 2.5–3.0 percent can the Fed ease that strain, restore disposable income, and stabilize demand in an environment where tariffs and sticky inflation complicate the outlook.
Regards,
Andre Chelhot, CFA
Editor
The Macro Anchor