Wall Street sees Fed rate cuts as risk management and anticipates two more reductions this year

NEW YORK — The expected interest rate cut in the United States was greeted on Wall Street as a "risk management" move by the Federal Reserve (Fed, the American Central Bank), driven primarily by the weakening labor market . The sharp drop in job creation in the world's largest economy and the difficulty in passing on tariffs to retailers make it likely, though not guaranteed, that at least two more cuts will be delivered by December, while inflation remains under pressure but manageable.

The Federal Open Market Committee (FOMC) reduced interest rates by 0.25 percentage points (25 basis points), to a range of 4% to 4.25% per year, the first adjustment of 2025. Nine of the 19 FOMC members project that interest rates will end 2025 in the range between 3.50% and 3.75%, which would imply two more reductions in the basic rate this year at the same level as the September cut.

"Given the shift in the current balance of risks, the Federal Open Market Committee has decided to lower our benchmark interest rate by 25 basis points," Fed Chairman Jerome Powell said in a press conference on Wednesday.

According to Powell, the weakness in the American labor market has more to do with President Donald Trump's immigration policy than his tariffs. He doesn't see the September rate cut making a "huge difference" in the country, but the Fed doesn't want labor conditions to weaken further.

"It was a risk management cut. Decisions will be made on a meeting-by-meeting basis," says Stephen Stanley, Santander's chief economist for the US. He notes that more than a third of the Committee's directors don't want further easing and, therefore, remains committed to just one more cut this year. For Thomas Simons, an economist at Jefferies, Powell's speech was "more pessimistic" for the most part, mentioning labor market risks. "Nothing prevents another adjustment in October if the data worsens," he assesses.

Morgan Stanley's chief U.S. economist, Michael Gapen, sees the Fed's decision as consistent with a "shift in the balance of risks." He notes that the authority's projections improve its estimate for U.S. Gross Domestic Product (GDP) growth to 1.6% in 2025, while maintaining unemployment at 4.5%, a combination that legitimizes consecutive rate cuts through January.

Along the same lines, Sarah House and Michael Pugliese of Wells Fargo assessed that the Fed provided a "balanced response to weak employment and still-high inflation" in the country. They project another 0.5 percentage point (50 basis points) of cuts this year and two more in 2026.

Following the announcement, the probability of a cumulative easing of another 50 basis points by December jumped from 48% to 90.6%, according to a survey by the American platform CME Group. "The market is already pricing in that the cycle won't end here," Powell noted, adding that the Fed "neither approves nor disapproves" of these bets. "I'm just saying this isn't just one action," he said.

There are those who defend a larger cut

However, there are voices on Wall Street advocating for a more aggressive stance. Ian Shepherdson of Pantheon Macroeconomics believes the Fed "waited too long for a soft landing" and will need to cut another 50 basis points in 2025 and 75 basis points in 2026, as he projects unemployment "above 4.75% in early 2026." James Knightley, chief international economist at ING, also sees a need for greater easing: "The labor market is weakening and consumption is cooling; there is already a premium for rates below 3% in the second half of 2026."

On the other side, Olivia Cross of Capital Economics notes that the Fed's indicated pace of inflation is "less aggressive than markets expected" and that projections show core inflation above the Fed's target even with cuts. Dario Perkins of TS Lombard agrees that the authority is "focused on employment," but is betting on "a faster labor market reaction, stickier inflation, and slower cuts," stating that "the recession talk seems exaggerated, as it was last summer."

Among the internal disagreements, new Fed Governor Stephen Miran—appointed by President Trump—advocated a 50 basis point cut, the only dissenter at the September meeting, as some traders had predicted. But, according to the Fed chairman, his position "did not receive widespread support."

Powell downplayed political pressure: "We are deeply committed to independence" — a statement that, according to analysts, sought to shield the institution from Miran's comment and criticism from the White House.

Rates on the radar

Beyond the labor market, tariffs remain on the Federal Reserve's radar. Powell acknowledged that import taxes "have begun to raise the prices of some goods," but said he believes the effect will be "short." Even so, the median projection for the core PCE remained at 2.9% in 2025, supported by the expectation that part of the impact will extend into 2026.

With slightly better growth projections (GDP of 1.8% in 2026) and contained unemployment, the Fed is betting on a calibrated adjustment. However, as Wells Fargo's House summarized, "the Fed is in no rush to return to neutral." Powell said that the path of US monetary policy is not "predetermined" and that decisions will be made at each meeting, depending on the data. This statement sums up the consensus—and caution—that the Fed has entered new territory: there is no risk-free path, but the balance, for most observers, has tipped enough to justify further cuts in the immediate future.