Economic Uncertainty and Political Pressure Drive Fed's Aggressive Rate Cut Path

The Federal Reserve’s recent decision to cut interest rates by 25 basis points has intensified speculation about further reductions, with officials signaling two additional cuts expected by year-end. The move, announced at the September 17 meeting, reflects growing concerns over a slowing labor market and persistent inflationary pressures. The Fed’s benchmark overnight lending rate now stands at 4.00%-4.25%, a shift from its previous characterization of policy as “moderately restrictive” to “more neutral.” The decision, supported by an 11-to-1 vote, underscores divergent views within the Federal Open Market Committee (FOMC), with Governor Stephen Miran dissenting in favor of a larger half-point reductiontitle1^[1].

Citi has responded to the Fed’s easing trajectory with a revised forecast for 2025, anticipating 75 basis points of rate cuts instead of the previously projected 50 basis points. The firm’s Head of Emerging Market Economics, Johanna Chua, attributed this adjustment to a weaker dollar and economic uncertainty, which have created a “path of least resistance” for the Fed to adopt a more dovish stancetitle2^[2]. Citi’s analysis highlights a 0.1% contraction in the U.S. economy during Q1 2025, driven by mixed retail sales and waning consumer confidence. The bank also raised its year-end S&P 500 target to 6,300 from 5,800, citing resilience in corporate earnings and accelerating AI-driven growth.

The Fed’s dot plot projections, released alongside the rate decision, reveal a wide range of views among policymakers. While a majority of FOMC members now target two additional cuts in 2025, one official—likely Miran—advocated for a total of 1.25 percentage points in reductions. The median forecast for 2026 includes one cut, significantly slower than market expectations, with officials signaling a long-run neutral rate of 3% by 2027title1^[1]. This divergence highlights the Fed’s balancing act between its dual mandate of price stability and maximum employment, as inflation remains above 2% while job gains have stalled.

Political dynamics have further complicated the Fed’s decision-making process. President Donald Trump’s sustained pressure for aggressive rate cuts and the recent controversy over Governor Lisa Cook’s removal have raised questions about the central bank’s independence. Cook, who voted for the September rate cut, remains on the board pending a Supreme Court review of Trump’s attempt to fire her. Meanwhile, Trump’s appointment of Stephen Miran, a vocal advocate for lower rates, has shifted the FOMC’s composition, with critics arguing that political influence risks undermining the Fed’s traditional autonomytitle1^[1].

Market reactions to the Fed’s decision have been mixed, with Treasury yields declining on short-duration issues but rising on longer-term bonds. Equity indices showed volatility, reflecting investor uncertainty over the pace of future rate cuts. Citi’s revised forecast, however, underscores confidence in equities, particularly as lower rates could stimulate economic activity and bolster corporate profits. The firm’s optimism contrasts with broader concerns about the labor market, where the unemployment rate reached 4.3% in August—the highest since October 2021—and job creation has stagnatedtitle1^[1].

The Fed’s easing trajectory faces potential headwinds, including the risk of inflation rebounding or the labor market showing unexpected resilience. However, analysts argue that the current policy framework prioritizes downside risks to employment, which have risen amid weaker hiring trends. As the Fed navigates these challenges, Citi’s bold equity forecast highlights the interplay between monetary policy and market sentiment, positioning equities as a key beneficiary of continued rate cutstitle2^[2].