After the Fed’s 25bps Cut: Markets Weigh Labor Risks, Inflation, and Liquidity Bets
The Federal Reserve’s 25 basis point (bp) rate cut, its first of 2025, set the stage for weeks of market debate.
While the move was widely expected, Chair Jerome Powell’s dovish tone at yesterday’s press conference and the Fed’s sharply divided dot-plot have left investors wondering what will happen next.
Powell Signals a Risk Management PivotPowell framed the rate cut as a risk management decision in his opening remarks, citing mounting cracks in the US labor market.
Revised payroll figures showing 911,000 fewer jobs than previously reported, alongside rising long-term unemployment, point to a weaker foundation than headline numbers suggest.
“The risks to inflation are tilted to the upside, and employment risks are tilted to the downside,” Powell said.
The Fed chair also noted that policymakers do not feel the need to move quickly on rates, but must act preemptively to prevent a deeper downturn.
Powell downplayed the inflationary impact of Trump’s tariffs, arguing that the pass-through has been “slower and smaller” than anticipated.
However, he acknowledged price pressures could persist into 2026. At the same time, he described the labor market as no longer “solid.”
He cited hiring slowing, immigration shifts reducing supply, and AI adoption potentially weighing on entry-level jobs.
Bottom line: Powell’s remarks were even more dovish than his 2024 guidance when the Fed slashed rates by 50 bps. This suggests a deliberate pivot toward prioritizing employment over inflation.
Market Reaction With Fed Divisions on Full Display: Dollar Slides, Equities Eye LiquidityThe new dot-plot revealed a central bank struggling to find consensus. Nine of 19 officials see two more cuts this year, while six expect no further easing.
One member even projects a hike, while Trump appointee Stephen Miran dissented in favor of a 50 bps cut.
“This meeting was a mess…One member thinks the Fed hikes this year…another thinks we get five cuts. This rigging of the voting to create the illusion of a ‘consensus’ and then publishing a wide dot plot like this only further undermines their credibility,” said macro investment researcher Jim Bianco.
Fed Dot Plot. Source: Jim Bianco on X
Meanwhile, The Kobeissi Letter called the move historic, highlighting the first rate cut in over 30 years with Core PCE inflation above 2.9%.
“It’s clear the Fed is prioritizing the labor market over inflation,” Kobeissi wrote, noting markets now expect as many as four more cuts by September 2026.
The immediate market response was swift. The US dollar fell to its weakest level since February 2022, while equities held near record highs.
Futures markets priced in at least two additional cuts by year-end, with Kalshi data showing the odds of three cuts spiking above 60%.
THE ODDS OF 3 RATE CUTS JUST SPIKED OVER 63% ON KALSHI
THE FED IS NOW ON TRACK TO CUT RATES AT EVERY SINGLE REAMING MEETING THIS YEAR
LOOKS LIKE TRUMP GOT TO POWELL HEAD https://t.co/2JVrcAsc2h pic.twitter.com/o2o2rcbzU3
Barchart highlighted that when the Fed cuts rates within 2% of stock market all-time highs, the S&P 500 has historically risen 100% of the time over the following 12 months, averaging a 14% gain.
When the Fed cuts interest rates within 2% of stock market all-time highs, the S&P 500 has gone on to finish higher over the next 12 months 20 out of 20 times (100% hit rate)