Fed Meeting Recap: Easy Policy | The New Neutral
September 2025, FOMC Decision
The Federal Reserve (Fed) cut rates 25 basis points to 4.0-4.25% as expected, but the real story lies in what this signals about the fundamental shift in monetary policy priorities. We’re not just in an easing cycle — we’re witnessing the emergence of a new policy framework where “easy policy is the new neutral.” Think of it as the Fed changing the rules of the game while the game is still being played.
Meeting Dynamics and Technical Details
The vote breakdown reveals the Board of Governors’ mindset. Only one member dissented: newly appointed Governor Stephen Miran, who favored a 50 basis point cut. Notably absent were the hawkish dissents from Governors Bowman and Waller that characterized July’s meeting — both voted with the majority this time. Even the Fed’s traditional inflation hawks joined the dovish chorus. It’s like watching conservative economists suddenly discover they love easy money.
The Dot Plot’s Divided Message: The Summary of Economic Projections (SEP) tells a fascinating story. The median projection shows three total cuts this year (including yesterday’s move), bringing the fed funds rate to 3.6% by year-end. But the distribution remains starkly bimodal: Nine participants favor two or fewer cuts this year, while 10 support three or more. It’s like a family dinner where half want pizza and half want sushi — technically, they can agree on “food,” but the details get messy. One participant (likely a non-voter) penciled in zero additional cuts, while one outlier (presumably Miran) sees six total cuts as appropriate.
Chair Powell deliberately downplayed the dot plot’s significance, emphasizing it’s “not a committee plan or decision” and stressing the Fed remains in a “meeting-by-meeting situation.” Translation: Don’t bet the farm on what we just told you, because we might change our minds next month.
Three Key Takeaways
- We’re Officially Easing — Powell explicitly labeled this a “risk management cut” — language that historically signals the beginning of sustained easing cycles. The Fed’s own projections show additional cuts in October and December, then one cut each in 2026 and 2027. Once this easing train gets rolling, it’s historically difficult to slow down.
- Labor Markets Have Definitively Taken Priority — The statement’s evolution tells the complete story. The Board changed its labor market assessment from “solid” in July to acknowledging “job gains have slowed, and the unemployment rate has edged up but remains low.” Most critically, they added that “downside risks to employment have risen.”
Meanwhile, inflation language actually strengthened, changing from “remains somewhat elevated” to “has moved up” — yet they’re cutting rates anyway. Recent data supports this concern: Average monthly job gains fell from 99k in the three months ending in May to just 29k in the three months ending in August, with significant downward revisions to prior months.
Powell noted that labor supply constraints from immigration restrictions and aging demographics mean the breakeven pace for monthly job gains could be “anywhere from zero to 50k” — far below historical norms. This suggests the Fed will tolerate much slower job growth without alarm, fundamentally changing the employment reaction function.
- The Neutral Rate Framework is Shifting Lower — Here’s the most important insight: Fed officials raised GDP growth projections (2025 and 2026, both up 0.2 percentage points to 1.6% and 1.8%, respectively) and lowered unemployment forecasts (2026-2027 down 0.1 percentage point each) while simultaneously projecting a lower rate path. This isn’t traditional monetary policy.
The SEP shows the fed funds rate reaching just 3.1% by 2027, with a longer-run neutral rate estimate remaining at 3.0%. But some analysts believe the Fed is targeting approximately 1% real (inflation-adjusted) rates as the new longer-term framework. This suggests policymakers believe the rate that balances economic growth and employment is structurally lower than previously estimated — even if it means accepting elevated financial market valuations and potential future asset bubbles.
Market Environment and Economic Implications
Consumer Dynamics: Consumer sentiment appears depressed given that wages haven’t caught up to the price level (versus just the inflation rate), creating a multi-year process where consumers feel economic stress despite moderating inflation, supporting the Fed’s employment focus.
Housing Market Response: While rate-sensitive housing construction remains under pressure, mortgage refinancing applications have already spiked dramatically — from around 500 on the index to over 1,500 — showing how quickly lower rates translate to economic activity.
Financial Conditions: The Fed has made “some progress toward a neutral rate” according to their own analysis, with the current 4.25% fed funds rate sitting roughly 1% above core PCE inflation. Their target appears to be closing this gap further.
Considerations and Implications from Recent Market Trends
Cash and Reinvestment Risk
As policy rates move systematically lower, holding excess cash may carry increased reinvestment risk. What has recently been considered a “risk-free” return is showing signs of becoming less reliable, as the Federal Reserve places stronger emphasis on supporting growth over financial stability concerns.
Fixed Income Observations
Current conditions highlight a relative difference in how sectors of the bond market may respond. Intermediate-term corporate bonds (three- to seven-year maturities) are positioned to reflect growth dynamics, while long-duration Treasuries remain more sensitive to further curve steepening. Historically, corporate credit has tended to benefit when financial conditions ease.
Equity Themes and Valuations
While large-cap equity valuations appear elevated, the prevailing monetary framework has generally provided support for asset prices. Within this environment, some areas that have historically been responsive include:
- Small- and Mid-Cap Equities: Past easing cycles have often coincided with periods of relative outperformance.
- Emerging Markets: Global central bank easing, reduced U.S. dollar pressure, and synchronized policy shifts have created tailwinds in prior cycles.
- Consolidation Activity: Cheaper capital has at times encouraged merger and acquisition activity, particularly in industries experiencing regulatory or policy adjustments.
Alternative Assets as Portfolio Insurance
Gold and Bitcoin are increasingly discussed in market commentary as playing a role beyond speculation. Market observers note that these assets are often viewed as insurance against financial repression and currency debasement, particularly when monetary policy independence is under political scrutiny. Gold prices have already responded to shifting expectations, while Bitcoin has shown trading patterns more correlated with liquidity conditions than with risk appetite alone.
Currency and Global Diversification
With the Federal Reserve acting more aggressively than many other central banks, the dollar’s multi-year strength may be reaching an inflection point. Market participants are watching opportunities across regions, including:
- European equities during periods of synchronized easing.
- Japanese assets as yen volatility moderates.
- Select emerging-market currencies and bonds in contexts where policy divergence is narrowing.
Risk Considerations and What We’re Watching
The Inflation Wildcard: While the Fed has deprioritized inflation concerns, tariff policies could reignite price pressures in 2026. The SEP already reflects this risk, with inflation projections rising 0.2 percentage points for next year.
Asset Bubble Formation: By explicitly choosing growth over financial stability, the Fed may be setting the stage for future asset bubbles. However, fighting the Fed during easing cycles has historically been a losing strategy.
Political Pressure: Questions about Fed independence aren’t theoretical — they’re already influencing Committee composition and voting patterns. This adds uncertainty to the policy path but likely biases toward easier rather than tighter policy.
The Bottom Line
We’re witnessing a fundamental recalibration of Federal Reserve priorities. The new neutral isn’t about balancing dual mandates — it’s about explicitly supporting growth and employment even at the risk of asset bubbles and long-term financial instability.
This represents the most significant shift in monetary policy framework since inflation targeting began. Position portfolios accordingly: Embrace risk assets, avoid cash, diversify globally and hedge with real assets. The era of “easy policy as the new neutral” has begun.