Market Update – September 18th, 2025

Date18 Sep 2025

The Federal Reserve cut interest rates by 0.25% yesterday, bringing the target range on the Fed Funds Rate to 4.00% -4.25%. This was the first policy action since December of last year and comes amidst a challenging backdrop for central bankers highlighted by shifting risks within the Fed’s dual mandate of price stability and maximum employment. Amid this backdrop, the Fed continues to face intense scrutiny from the White House and newly sworn-in committee member Stephen Miran cast the sole dissenting vote on the policy decision.

Below are our five observations from the meeting:

Goals in tension

Powell reinforced the narrative that the Fed is in a “challenging situation,” with its two main goals of price stability and maximum employment pulling in opposite directions. Inflation remains elevated above the Fed’s 2% target and has shown some recent re-acceleration in goods categories, arguing for keeping policy tight. At the same time, the labor market is losing momentum: job gains have slowed down and unemployment has edged higher.

This creates a genuine policy dilemma: cutting rates too aggressively risks fueling another inflationary upswing, while staying too restrictive risks allowing a sharper deterioration in employment and growth. As a result, Powell emphasized that policy decisions will remain data-dependent, keeping markets focused on each upcoming inflation and employment report.

“Risk Management Cut”

Powell characterized the action as a “risk management cut” a term to mean that the Fed isn’t trying to juice growth necessarily and isn’t kicking off a full easing cycle but hedging against the risk that the economy and labor market could slow more than expected. The cut is meant to reduce downside risks rather than deliver a boost.

In other words, the economy is not in recession and inflation is still above target, but the Fed sees rising risks that labor market weakness could worsen if policy stays too tight for too long. The cut helps reduce that risk without signaling an all-out pivot to easy policy. Powell was careful to stress that policy remains data-dependent and “not on a preset course,” which means future cuts will depend on incoming inflation and employment data.

The Fed used a similar approach in 2019, when it delivered three “mid-cycle adjustment” cuts to insure against downside risks from trade tensions and slowing global growth. That episode helped extend an economic expansion and did not trigger a runaway inflation problem. By invoking risk-management today, Powell is signaling that the Fed is taking a measured step toward neutral.

Summary of Economic Projections

The FOMC compiled their updated Summary of Economic Projections at the meeting with policymakers expecting 2 additional rate cuts by year-end derived from the median Fed Funds Rate projected at 3.6% at the end of 2025.¹

Growth expectations were revised higher. The unemployment rate was projected to settle at 4.5% but the committee did not forecast a further increase in 2026 and 2027. Inflation is projected to remain above the Fed’s 2% target but the committee again did not forecast a spike in inflation, with the rate of change moderating to 2.6% in 2026 and hitting the Fed’s target in 2028.²

The confusion amongst investors is the question of how rate cuts come into play if the committee is not explicitly projecting labor market weakness. Powell stressed that the Fed’s projections still call for moderate growth and only a gradual rise in unemployment, but policymakers chose to cut rates as a “risk-management” step. The goal is to reduce the chance that a softening labor market tips into a sharper slowdown, even though a recession is not their base case. Powell reminded investors that the projections are not indicative of future plans, and future decisions will depend on how inflation and employment data evolve in the months ahead.

Miran’s influence

Stephen Miran was sworn in hours ahead of the Fed’s meeting and joined in the discussion. Stephen Miran made an outsized impression this week after being narrowly confirmed to the Fed Board just hours before its key policy meeting. He immediately dissented from the FOMC’s decision arguing instead for a more aggressive 0.50% cut.

Miran’s year-end rate path was far steeper than the committee median, effectively making him the most dovish voice at the table and echoing the White House’s push for a faster pace of easing. While the Fed does not attribute individual projections, market watchers quickly concluded which “dot” was his:

^{Source: Federal Reserve (https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20250917.pdf)}

Powell briefly addressed the new committee member and clarified what it would take for any single voter to tangibly influence the policy decision:

“The only way for a voter to really move things around is to be incredibly persuasive and the only way to do that in the context in which we work is to make really strong arguments based on the data and one’s understanding of the economy. That’s really all that matters and that that’s how it’s going to work. That’s in the DNA of the institution. That’s not going to change.”³

“It’s deeply in our culture to do our work based on the incoming data and never consider anything else.”⁴

The composition of the FOMC will almost certainly change in the next few months as President Trump fills open seats, logically tilting the committee toward a more dovish, pro-growth stance. That could mean a lower long-term policy rate path, a greater willingness to cut preemptively, and possibly less emphasis on inflation risks if growth slows but it will require close monitoring in the coming months, quarters and years.

What it means for investors

The Fed’s “risk-management cut” signals a shift toward back to easing but data-driven framing means policy is not on autopilot.

With growth projections still positive and inflation above target, investors should not expect a rapid series of rate cuts, although the market is pricing it in. Instead, each move will depend on upcoming jobs and inflation data, keeping markets highly sensitive to monthly releases.

In fixed income, a gradual easing path favors extending duration selectively but maintaining awareness of upside inflation risks and credit quality. In equities, lower rates are generally a positive but expect volatility as markets react to every data point.

We will continue to stay in close contact as we enter the 4^th quarter of the year and expect an eventful end of the year for markets. Please reach out to our team with any questions or concerns as always.

Footnotes:

The views expressed herein are those of John Nagle on September 18^th, 2025, and are subject to change at any time based on market or other conditions, as are statements of financial market trends, which are based on current market conditions. This market commentary is a publication of Kavar Capital Partners (KCP) and is provided as a service to clients and friends of KCP solely for their own use and information. The information provided is for general informational purposes only and should not be considered an individual recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal or tax advice. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s investment portfolio. All investment strategies have the potential for profit or loss and past performance does not ensure future results. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. The charts and graphs presented do not represent the performance of KCP or any of its advisory clients. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that a client’s portfolio will match or outperform any particular benchmark. KCP makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based on information that KCP considers reliable, it is not guaranteed as to accuracy or completeness. This information may become outdated and KCP is not obligated to update any information or opinions contained herein. Articles herein may not necessarily reflect the investment position or the strategies of KCP. KCP is registered as an investment adviser and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability.

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