• The Federal Reserve's first rate cut since 2024 is followed by economic data showing unexpected resilience.
  • Markets have pared back bets on an October cut, with odds falling to 86% as Treasury yields rose and the dollar strengthened.
  • Internal divisions at the Fed are highlighted, with new Governor Stephen Miran pushing for more aggressive easing than Chair Powell supported.

Last week’s decision by the Federal Reserve to lower its benchmark interest rate by 25 basis points to a range of 4.00%–4.25% was quickly met with data suggesting the US economy is holding firm, complicating the path for further rapid easing. The move, driven by concerns over a softening labor market, now faces a reality check as fresh indicators show solid activity and limited layoffs.

The timing creates a delicate situation for Chair Jerome Powell, who advocated for a cautious approach during the Federal Open Market Committee meeting. His position was challenged by newly appointed Fed Governor Stephen Miran, who, according to people familiar with the matter, argued for a more aggressive 50-basis-point cut. Miran, a recent appointee of President Trump, was outvoted, but the dissent signals growing pressure for faster action.

Market reaction has been swift in reassessing the likelihood of continued cuts. Following the release of the new economic data, traders sold Treasurys, lifting yields, and bolstered the dollar. Pricing in futures markets now implies an 86% chance of a cut at the October meeting, down from 92% just days ago, with a noticeable number of bets forming that the Fed will hold rates steady. "The data are telling us the economy is still doing just fine," a note from Capital Economics observed, capturing the shift in sentiment.

The Fed’s own projections, which were updated last week, now anticipate up to two additional cuts in 2025. However, these forecasts are contingent on the evolution of economic data, which has so far shown GDP growth expectations being revised higher for the coming years. The central bank’s preferred inflation gauge, the PCE index, was also nudged up slightly for 2026, adding to the case for a patient stance.

Efforts to reach a spokesperson for Governor Miran for comment were unsuccessful. A Fed representative declined to elaborate beyond the official policy statement, which cited “recent indicators of the labor market” as a primary factor for the cut, while noting that “risks to achieving its employment and inflation goals have moved toward better balance.”

The central bank’s decision to pivot after holding rates steady for nine months was predicated on a string of softer labor market readings. Yet, if the latest figures prove to be the start of a trend, the rationale for a swift easing cycle diminishes. The Fed now appears to be in a wait-and-see mode, with the immediate future of monetary policy heavily dependent on whether the economy’s resilience persists.