Fed Launches Aggressive Rate Cuts — Melt-Up to Continue

The Federal Reserve has launched an aggressive policy of interest rate cuts, prioritizing the weakening labor market over accelerating inflation, and expects two more cuts this year despite inflation projections remaining elevated.

• Fed projects two more rate cuts this year, prioritizing the labor market over accelerating inflation.

• Inflation expected to remain above 2% target until 2028, challenging Fed's credibility.

• No immediate concern from the Fed about stock market 'melt-up' or elevated asset prices despite rate cuts.

The Federal Reserve concluded its meeting by cutting interest rates and signaling an aggressive path of future cuts, driven by concerns over a softening labor market. Despite projections showing inflation accelerating and remaining above the 2% target until 2028, the Fed is shifting its focus more towards maximum employment. The market largely anticipates these additional rate cuts, suggesting a continued period of easy money and potential 'melt-up' in financial markets.

Economic Projections Update

• 00:00:21 The Federal Reserve's updated Summary of Economic Projections (SCP) shows an upward revision for economic growth this year, from 1.4% to 1.6%. However, the unemployment rate projection remains at 4.5% for 2025, indicating an expected weakening of the labor market from its current 4.3%. Inflation, as measured by PC and core PC, is projected to accelerate for the rest of the year, with both metrics expected to end the year higher than their current levels, remaining at 3.0% and 3.1% respectively.

Aggressive Rate Cut Path

• 00:01:44 The Federal Reserve plans two more interest rate cuts this year, in October and December, shifting from a previous expectation of only one additional cut. This aggressive approach is primarily motivated by concerns over the labor market's softening. The CME FedWatch tool indicates that market confidence in two more rate cuts has significantly increased from 65.9% to 82.6% following the Fed's announcement, reflecting market alignment with the central bank's projected policy path.

Fed's Dual Mandate Shift

• 00:02:54 Federal Reserve Chair Jerome Powell stated that the Fed is now prioritizing the labor market over inflation, even as inflation is accelerating, due to its dual mandate. Powell noted that since April, risks of higher and more persistent inflation have decreased slightly because the labor market has softened and GDP growth has slowed. The Fed believes its policy actions are addressing downside risks in the labor market, which include declining job creation and rising youth unemployment.

Rate Cut Strategy & Credibility

• 00:04:19 A 0.25% interest rate cut is seen as part of a larger, ongoing process rather than a standalone impact, with more cuts expected. Powell emphasized that policy decisions are made meeting-by-meeting and are data-dependent, despite internal projections for a specific path. Regarding the 2% inflation target, Powell acknowledged that projections show it won't be met until 2028, but maintained that the policy path is designed to achieve this goal, addressing concerns about the Fed's credibility.

Financial Stability & Melt-Up Risk

• 00:10:02 The Federal Reserve is proceeding with rate cuts even as the stock market is at or near all-time highs, acknowledging concerns about potentially fueling a 'melt-up.' Powell stated that the Fed's focus remains on maximum employment and price stability, while also monitoring financial stability. He indicated that overall, households and banks are in good shape, and he does not believe structural vulnerabilities or asset prices are currently at 'elevated levels,' suggesting a lack of concern about an immediate bubble risk.