The Federal Reserve’s recent decision met expectations by acknowledging weaknesses in the labor market but still expressed worries about inflation and uncertainty. Surprisingly, only one member voted against the choice to cut rates by 50 basis points, as many anticipated two or three cuts. This led to a slightly more aggressive stance. The Fed’s dot plot projections were more assertive than what the market expected. Market participants thought there would be 68 basis points of easing by the end of 2025 and a total of 148 basis points by the end of 2026. However, the Fed indicated three cuts in 2025 and just one in 2026.

Fed Decision Divisions

In 2025, only a small majority supported the three cuts. Ten members expected two or more cuts, while nine projected one or fewer. This shows a range of opinions within the Fed on future rate cuts. Chair Powell, in line with his Jackson Hole speech, highlighted the labor market’s struggles linked to weak job reports, mainly due to changes in immigration. He called rate cuts “risk management” actions, suggesting there might be fewer cuts if data improves. Powell aimed to balance various economic factors, leaving future monetary decisions up to new economic data. This week’s Federal Reserve decision seems neutral to slightly hawkish, despite the announced rate cut. While the market anticipated three more cuts for 2026, the Fed forecasts only one more. This disconnect is something traders should monitor closely in the coming weeks. The Fed is responding to clear signs of a weakening labor market. Recent Non-Farm Payroll reports fell short of expectations, with the August 2025 report showing only a gain of 140,000 jobs. Initial jobless claims have also risen, remaining around 245,000. However, Powell views this as a manageable slowdown rather than a crisis requiring drastic cuts.

Inflation Concerns Remain

The central bank’s caution makes sense, given that core inflation, while lower than before, is still stubbornly high at 3.1% year-over-year according to the latest CPI data. After aggressive rate hikes throughout 2023 to control rising prices, the Fed is reluctant to ease policies too quickly. This suggests they can tolerate a weaker labor market better than a surge in inflation. This situation offers opportunities for derivative traders, with an uncertain path ahead influenced by the next few data reports. The rate cut was described as a “risk management” move, which means strong NFP or high inflation numbers in October could quickly shift the current soft stance. Therefore, strategies like straddles or strangles on interest rate futures, which profit from increased volatility, may be appealing. We should also remember the committee’s divisions, as a narrow 10-9 majority supports the three cuts proposed for 2025. This fragile agreement means the median dot plot could change quickly if just one or two members alter their views. Thus, planning for a smooth and predictable series of rate cuts may be premature. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now