September 19, 2025
The Federal Reserve met and did largely what everybody expected. It cut rates by 0.25% in September and talked about two additional similar-sized cuts by yearend. The Fed noted that the action was being taken because the “downside risks to employment have risen.” If the unemployment rate continues to climb from its current level of 4.3% to 4.5%, which the Fed expects by December, such action would certainly seem justified. But what if the economy remains relatively robust and the unemployment rate does not rise? What would cause the Fed to abandon the additional rate cuts and a slow but steady return to the 3.0% funds rate level that it considers “neutral”? Our answer: Nothing! The rate cuts are baked in the cake regardless of the economic environment because of the intense pressure from Trump to cut rates quickly and dramatically. It is hard to imagine the tension in the room as one of the seats at the FOMC table was occupied by staunch Trump ally Stephen Miran who intends to keep his position as chair of the president’s Council of Economic Advisors while simultaneously serving on the Fed’s Board of Governors. Another seat at the table was occupied by Lisa Cook who Trump has attempted to fire for alleged mortgage fraud. While she received court approval to remain on the Board of Governors for the September meeting, Trump has now asked the Supreme Court to allow him to fire her. And Trump has tried to fire Fed Chair Powell on numerous occasions. All Fed Governors and Reserve Bank presidents alike certainly pondered their own future if they strayed too far from the president’s wishes. While the Fed may claim that its policy decisions are based exclusively on the economic environment, it is inconceivable that FOMC members were able to completely ignore the unprecedented political attack. That leads us to conclude that the additional rate cuts penciled in between now and yearend are foregone conclusions. Nothing is likely to derail that process.
As noted in its “Summary of Economic Projections”, the Fed believes that its policy is neutral when the funds rate is at 3.0%. Prior to the meeting the funds rate was 4.3%. Thus, going into the meeting the Fed believed that its policy was restrictive. But the neutral rate is unobservable. It cannot be accurately measured by the Fed or anybody else. In other words, it is a semi-educated guess. Five years ago the Fed guesstimated that the neutral rate was 2.5%. Today it is 3.0%. At this past week’s meeting nine Fed officials believed the neutral rate was above the 3.0% mark with the highest being 3.9%. Thus, there is a good chance that the neutral rate is higher than 3.0% which suggests that Fed policy may not be nearly as tight as it believes currently.
After this week’s rate cut the funds rate is 4.1%. If the neutral rate is 3.0%, then Fed policy remains restrictive by perhaps 1.1%.
But if Fed policy is so restrictive, why is the economy still chugging along at a rate of 2.0%? Why is inflation so steady at 2.9% and showing no hint of heading lower? And why is the stock market at a record high level? Something does not fit.
The Fed believes the neutral rate is 3.0%. Amongst FOMC members the lowest estimate of the neutral rate is currently 2.6% (Stephen Miran ?). The problem is that President Trump pegs the neutral rate at 1.0% which is not even remotely close to what anyone at the Fed believes. Perhaps this is the usual Trump bluster and he really does not believe it is 1.0%, but is throwing out an outrageous number to spur the Fed into serious rate-cut mode. Regardless of whether he believes it, all 19 FOMC members are acutely aware of what he said and are feeling the heat. There is no way the Fed will ever believe that the neutral funds rate is even remotely close to 1.0%. 3.0% is not 1.0%.
We wonder what happens if the economy does not cooperate and the unemployment rate does not rise between now and yearend. Could the Fed abandon ship and forego the last two rate cuts this year? No way. The Fed said it expects GDP growth of 1.8% for 2025. We know that the economy declined 0.5% in the first quarter and rebounded by 3.3% in the second quarter. The only way growth for the year can be 1.8% is if average growth in the final two quarters of the year is 2.2%. With just slightly more than one month to go, third quarter GDP growth is almost certain to be higher than that. The widely respected Atlanta Fed GDP Nowcast pegs third quarter growth at 3.3%. Our own estimate is 2.8%. Unless something dramatic happens between now and the end of October when the initial estimate of GDP growth is released, the economy appears to be approaching yearend with considerable momentum.
The Fed said it expects the unemployment rate to rise from 4.3% currently to 4.5% by the end of the year. But if third quarter GDP growth is as strong as it appears. the unemployment rate is unlikely to climb.
The Fed’s estimate of the core personal consumption expenditures deflator at 3.1% for the year seems to be a reasonable expectation.
Does any of this matter? Probably not. We are firmly convinced that regardless of the economic environment, the two additional rate cuts between now and December are certain to occur. Politics has entered the equation. Economists still have to figure out GDP growth, the unemployment rate, and inflation (which is challenging enough). Now they have to consider a political factor. Good luck with that!
Stephen Slifer
NumberNomics
Charleston, S.C.
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