The Federal Reserve's recent quarter-point interest rate cut, while meeting market expectations, carries a more hawkish undertone than initially perceived, according to prominent economist Mark Zandi. In a post-announcement interview, Zandi described the Fed's communication as a delicate balancing act, aiming to mitigate job market risks while simultaneously signaling a reluctance to initiate a cycle of aggressive rate reductions.
Zandi characterized the 25-basis-point cut, bringing the federal funds rate to 4% to 4.25%, as 'right down the strike zone' in terms of magnitude. However, he emphasized the hawkish nature of the accompanying messaging. Chairman Jerome Powell's focus on managing 'downside risks' to employment, rather than initiating a rapid easing of monetary policy, contributed to this perception.
The minimal dissent within the Federal Open Market Committee (FOMC) further underscored this hawkish stance. Despite previous dissenting votes, neither Christopher Waller nor Michelle Bowman opposed the current cut, a notable absence considering the dissenting vote from newly appointed Governor Stephen Miran, who advocated for a significantly larger reduction. Miran's simultaneous role as a White House employee has raised concerns about the Fed's independence, prompting speculation regarding potential political influence.
Zandi highlighted Miran's call for a more substantial rate cut as evidence of the mounting political pressure on the central bank, noting the President's desire for lower interest rates and his influence over future appointments, including the next Fed Chair. While Powell emphatically asserted the Fed's commitment to independence, Zandi remains concerned.
The current economic landscape presents a challenging environment for the Fed. Slowing job growth, inflationary pressures exacerbated by tariffs, and constrained labor supply due to stricter immigration policies have created a unique situation characterized by both upside inflation risks and downside employment risks – a recipe for stagflation. This complexity significantly complicates the Fed's policy decisions.
Zandi believes the Fed's framing of the cut as 'risk management' reflects this caution. He interprets Powell's actions as a preemptive measure, suggesting that while the job market isn't expected to weaken drastically, the rate cut serves as a safeguard. Despite the cut, interest rates remain above Zandi's estimated neutral rate (currently around 3.5%, projected to reach 3% within a year), indicating a still-restrictive, though not highly restrictive, monetary policy.
Zandi forecasts further rate cuts in October and December, aiming to achieve a neutral rate by mid-2026. However, he cautions that failure to deliver on these cuts could trigger a market unraveling, jeopardizing economic stability. He stresses that the current cut alone won't prevent a potential jobs recession, emphasizing the need for more substantial action. Ultimately, Zandi concludes that the upcoming appointment of Powell's successor will be a crucial indicator of the Fed's ability to withstand political pressures and maintain its independence.
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Originally published at: https://fortune.com/2025/09/19/feds-cut-was-hawkish-than-expected-jobs-recessionzandi/
