Payden & Rygel: Is the Fed's dual mandate 'in tension' or a muddled message?
The Federal Open Market Committee (FOMC) lowered its target range for the federal funds rate by 25 basis points at the September meeting, marking the first rate cut of 2025. Why not move faster? Chair Powell described the Fed’s dual mandate as 'in tension'. But is it true tension or a muddled message?
Here’s our take:
- In our view, the Fed’s inflation and full employment mandates are not at odds with each other. Instead, a weaker labor market will eventually lead to further disinflation of services, mitigating upside risks to inflation.
- Further, if the jump in goods prices is a one-off factor due to tariffs like Chair Powell described, rather than a reflection of a demand surge outstripping available supply, like we saw in 2021, shouldn’t goods prices subside more quickly in 2026?
- The reality of the dual mandate tension message is that the Fed Chair serves as the spokesperson for the FOMC and must balance the diverging views of the 19 FOMC members on growth, inflation, and the labor market. Still, we think inflation worries are overblown, and downside risks to the labor market are more worrisome.
- As a result, we continue to expect the Fed to cut two more times this year, in line with the 2025 median “dot.” But further out in 2026, absent a re-acceleration in job growth, we think it’s likely the fed funds rate will end up lower than the median 'dot' expected as of September, closer to a 2.75%-3.00% target range, which means another 75-basis points worth of cuts in 2026.