The Fed Cut 2025

Federal Reserve Delivers Expected Rate Cut, but Risks Loom Larger

The Federal Reserve cut its benchmark rate by 0.25% at Wednesday’s meeting, a move fully anticipated by markets. Mortgage rates barely moved, and the 10-year Treasury yield hovered near 4.02%, essentially unchanged from the day prior. On the surface, the Fed’s decision was framed as a balanced response to slowing job growth on one hand and the lingering threat of inflation on the other.

Yet beneath the calm rhetoric lies a deeper concern. Chair Jerome Powell and his colleagues continue to emphasize a backward-looking approach, pledging that all policy will be “data dependent.” While cautious in tone, this strategy risks missing the broader trajectory of the economy. Indicators from the labor market, housing, and consumer spending suggest a slowdown is already underway, leaving many to wonder whether the Fed is acting too timidly.

Labor Market Weakness
Unemployment has crept higher in recent months, while new job creation has softened considerably. Businesses are scaling back hiring plans, and layoffs, though not widespread, are no longer isolated to a few sectors. A cautious household sector follows naturally: if people feel less secure in their jobs, they spend less. And when spending slows, demand for goods and services declines, pulling down prices. This is, in essence, Economics 101.

Housing at a Standstill
The housing market offers a stark case study. Sales have fallen to their lowest levels in more than two decades. Buyers face affordability challenges despite modest rate relief, while sellers are reluctant to cut prices further. Even with mortgage rates poised just above 6%, activity remains subdued, underscoring how fragile housing demand has become. A more decisive easing from the Fed could provide some relief, but for now the market remains in limbo.

The Inflation Specter
Despite this clear evidence of weakening fundamentals, the Fed still clings to the specter of re-accelerating inflation. While vigilance against rising prices is prudent, inflation has already moderated significantly from its peak, and forward-looking pressures—falling energy prices, softening wage growth, and improving supply chains—suggest further easing ahead. The risk today is not a resurgence of runaway prices, but rather a policy stance that remains too tight in the face of mounting slack.

What Comes Next
Markets now expect the Fed may deliver two more 0.25% cuts before year-end. Such moves could provide incremental relief, but they may not be enough to reverse the downward trends in housing or employment. Monetary policy works with long lags, and cautious half-measures risk leaving the economy vulnerable to a sharper downturn.

For mortgage markets, the story remains one of patience. Because Wednesday’s cut was already priced in, mortgage rates were largely unchanged. To push borrowing costs lower, investors will need greater confidence that the Fed is committed to further easing. That conviction may not arrive until the Fed signals less concern about inflation and more urgency about growth.

The Bottom Line
The Fed delivered what markets expected, but expectations alone are no substitute for leadership. By looking into the rear-view mirror rather than the windshield, policymakers risk missing the larger slowdown already unfolding. Whether two more modest cuts this year will be enough remains uncertain. What is clear is that the economy cannot afford a central bank that continues to play catch-up.