Fed staff recommends 25‑basis‑point cut as growth moderates and inflation cools

Federal Reserve staff presented an economic briefing and recommended a 25 basis‑point reduction in the policy rate, saying the balance of risks has shifted toward labor‑market weakness even as inflation remains above the Fed’s 2% target.

In a presentation to the committee, S2 (Valeria), a Fed presenter, said real gross domestic product grew at a 1.4% annual rate in the first half of 2025, below long‑run potential near 1.8%, with a Q1 contraction of 0.6% followed by a 3.8% rebound. “I have a 25 basis point cut,” S2 said when putting the recommendation to the committee, adding that the “balance of risk is now tilting more towards unemployment compared to inflation.”

S1, the lead presenter, summarized inflation and labor‑market readings that shaped the recommendation: headline PCE inflation stood at 2.7% and core PCE at 2.9%, while the unemployment rate in August inched up to 4.3%. S1 noted that the personal‑savings rate has declined to 4.6% year‑over‑year, reducing household buffers, and that recent downward revisions to payroll data (about 911,000 jobs revised down over the prior 12 months) suggest additional slack in the labor market.

Presenters argued that some upward pressure on core goods prices reflected tariff effects that are likely transitory, while services‑sector spending and certain core goods categories remain sources of stickiness. On neutral policy, speakers reviewed differing estimates of the neutral real rate (r*), citing models that put r* between roughly 0.84% and close to 2%, and stressed that model uncertainty argues for data dependence.

Several presenters voiced support for the proposed 25‑basis‑point cut. S5 said, “I agree with the 25 basis point cut,” and S3 said the path of rates matters more than any single decision and that she would “vote in accordance with my colleagues in favor of a 25 basis point cut.” At the same time, S1 emphasized maintaining balance‑sheet reductions, noting the banking system holds ample reserves despite the reduction in RRP facility usage.

Policymakers pressed presenters on the divergence between slower monthly job gains and only modestly higher unemployment. S6 asked how those observations are consistent; presenters replied that unemployment can lag other labor‑market indicators, that revisions to payroll data matter, and that forward‑looking measures such as the vacancies‑to‑unemployment ratio (about 0.99) point to a loosening labor market. S1 said this mix points to a need for careful, data‑dependent policy.

On financial‑market signals, presenters said the Fed must monitor conditions—yield curves, credit spreads and reserve levels—to ensure that markets function and that the federal funds rate can be implemented as intended, but they framed financial‑stability concerns as secondary to the dual mandate. S2 said that while markets’ functioning matters for implementation, the Fed’s primary goal remains price stability and maximum employment.

The presentation concluded with presenters reiterating the recommendation for a 25‑basis‑point cut while stressing continued monitoring of inflation, labor‑market indicators and balance‑sheet dynamics. The transcript records the recommendation and presenters’ stated votes in favor but does not record a formal committee decision in this session.

The committee moved to questions after the presentation; presenters replied to follow‑up questions about labor‑market indicators, r* estimation, and how financial‑market signals should affect policy.