FOMC: Cushioning the US labor market

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The September 2025 meeting of the Federal Open Market Committee (FOMC) arrives at a pivotal moment for US monetary policy. With inflation still elevated, labor market signals turning decisively weaker, and political pressures mounting on US Federal Reserve (Fed) independence, policy decisions over the balance of this year are likely to shape the trajectory of the US economy well into 2026.

As expected, this meeting, the FOMC cut interest rates by 25 basis points (bps) to a range of 4.0% to 4.25%, with just one dissenting vote. Stephen Miran, who was just confirmed this week as the newest member of the Fed Board of Governors, advocated for a larger, 50 bps reduction. The Fed’s updated Summary of Economic Projections reflects a more dovish outlook from the last publication in June. Now, short-term rates are expected to end 2025 and 2026 at lower levels than the Committee expected then, despite an upgrade to its growth forecast.

Inflation: Sticky and politically charged

Inflation remains stubbornly above the Fed’s 2% target, with core personal consumption expenditures — the Fed’s preferred measure — ticking up to 2.9% year over year through August. While some policymakers argue that tariff-induced inflation may be transitory, others worry that the cumulative effects of trade policy and fiscal stimulus could entrench price pressures. My view is that inflation will remain closer to 3% than 2% over the next year as financial conditions remain loose — a dynamic likely to be reinforced by fiscal easing, deregulation, and reduced trade policy uncertainty.

Labor market: The inflection point arrives

After months of resilience, the labor market is showing signs of strain. Recent payroll growth has fallen short of expectations and there have been sizable downward revisions to prior months. The unemployment rate increased to 4.3% in the latest reading and constrained labor supply — exacerbated by immigration policy — has further complicated the Fed’s calculus.

These developments have shifted market expectations sharply, with futures markets now pricing another 132 bps of interest-rate cuts over the next year, which would bring the policy rate slightly below the FOMC’s estimate of neutral. This seems unduly aggressive to me, given the overall strength of the economy and still uncertain labor market supply-and-demand dynamics.

FOMC composition: Political intrusion and institutional risk

Perhaps the most consequential development is the political reshaping of the Fed itself. President Trump’s firing of Governor Lisa Cook — for which he cites pre-appointment mortgage fraud allegations — has ignited a constitutional debate over the limits of executive power.

While the Supreme Court has previously ruled in favor of Fed independence, this precedent stands on uncertain footing. Arguably vague language permitting executive action “for cause” may now be exploited to remove dissenting voices.

Governor Cook’s removal has been overruled for now, with Trump vowing to have the Supreme Court weigh in. If the final arbiter sides with Trump, his appointees could soon hold a majority on the Board of Governors, and thus steer policy in a more dovish direction. This shift could have profound implications:

Monetary policy bias: Future chairs may be selected for their dovish credentials, undermining the Fed’s inflation-fighting credibility.
Regulatory rollbacks: A Trump-aligned Board could accelerate deregulation, particularly in banking oversight.
Regional Fed reappointments: All 12 regional Fed presidents face reappointment in 2026, and a politicized Board could reject hawkish candidates, influencing rate decisions indirectly.

The Fed’s difficult balancing act

At its September meeting, the FOMC restarted its journey toward a more neutral policy setting. As inflation remains sticky and labor markets soften, the Fed must balance its dual mandate with growing political interference. The firing of Governor Cook and the pressure on Fed Chair Jerome Powell to conform to executive preferences threaten to erode the Fed’s credibility at a time when its impartiality is most needed.

Whether the Fed can maintain its institutional integrity while navigating economic crosscurrents will define not only the path of monetary policy but also the resilience of the US dollar and US financial markets in the face of political volatility.