The Fed’s New Compass: Navigating the “Shift in the Balance of Risks”
- Alastair Borthwick
- Sep 22
- 5 min read
Updated: Oct 13
On September 17, 2025, Federal Reserve Chair Jerome Powell announced a 25-basis-point cut to the federal funds rate, stating the move was made "in light of the shift in the balance of risks." This decision marks the Fed's first rate cut since December 2024 and has drawn widespread attention from global markets. This article aims to provide an in-depth analysis of the decision-making logic, economic context, and market reactions and interpretations behind this rate cut. The analysis indicates that this cut is not a response to an ongoing economic recession but rather a "precautionary" or "risk management" operation aimed at managing future risks. The core driver is the growing concern over downside risks in the labor market, even as inflationary pressures persist. Market reaction to this has been complex, with experts generally agreeing that this marks the beginning of a new rate-cutting cycle, though significant disagreements exist regarding the future policy path.
I. Powell's "Balance of Risks" Thesis
At the press conference on September 17, Chair Powell provided the core justification for the rate cut. He explicitly stated that the decision was based on dynamic changes in the assessment of economic risks. We can find his key statements in the official press conference transcript released by the Federal Reserve.
"To support our goals, and in light of the shift in the balance of risks, the Federal Open Market Committee decided today to lower our policy interest rate by 1/4 percentage point." [1]
Powell further defined this action as a form of "risk management," implying the precautionary nature of the policy. He explained how the balance of risks had shifted:
"In the recent period, inflation risks have tended to be to the upside, while employment risks have tended to be to the downside—a challenging situation. When we have this kind of tension in our goals, our framework calls for us to balance both sides of the dual mandate. The balance of risks has shifted as the downside risks to employment have increased. Therefore, we believe it is appropriate at this meeting to take another step toward a more neutral policy stance." [1]
This statement clearly indicates that between the dual mandates of "price stability" and "maximum employment," the Federal Reserve's focus is tilting toward the latter. Although inflation remains "somewhat elevated," signs of a slowing labor market and the prospect of a potentially rapid deterioration have become the primary catalysts prompting policymakers to act.
II. The Economic Data "Puzzle" Behind the Rate Cut
The Federal Reserve's decision was not made in a vacuum but was based on a complex set of economic data. By reviewing recent key economic indicators, we can more clearly understand the basis for its "balance ofrisks" judgment.
Economic Indicator | Latest Data (as of September 2025) | Trend and Interpretation |
Federal Funds Rate | 4.00% - 4.25% | A 25-basis-point cut, the first since December 2024. |
Inflation (CPI) | Year-over-year growth of 2.9% (August), up from 2.7% in the previous two months. [2] | Inflation has picked up slightly, particularly in services, keeping core inflation stable at 3.1%. |
Labor Market | The unemployment rate rose to 4.3% in August, with nonfarm payroll growth slowing significantly to a monthly average of 29,000. | Job growth is now below the level needed to maintain a stable unemployment rate. The risk of a rapid deterioration has become a "material risk." |
Economic Growth (GDP) | Growth in the first half of 2025 was approximately 1.5%, lower than the 2.5% in 2024. | The slowdown in growth primarily reflects weakness in consumer spending and business investment. |
Meanwhile, the Fed's latest Summary of Economic Projections (SEP) also reflects its judgment about the future. Despite upgrading its short-term GDP growth forecast, its projections for a higher unemployment rate and core inflation remaining above the 2% target in 2026 paint a complex picture of slowing growth, employment pressure, and sticky inflation. It is this picture that supports the necessity of taking preemptive measures.
III. Multidimensional Interpretations from Markets and Experts
Following the announcement of the rate cut, the market reacted immediately, and major global investment institutions quickly provided their interpretations. Overall, the market reaction showed a typical "sell-the-news" pattern, while expert opinions focused on the nature of the cut, its future path, and potential risks.
Immediate Market Reaction
Asset Class | Immediate Reaction (September 17) |
U.S. Stocks | Mixed, with the Dow Jones Industrial Average rising while the S&P 500 and Nasdaq Composite fell. |
U.S. Treasuries | Yields rebounded after a brief dip, exhibiting a "buy the rumor, sell the fact" characteristic. |
Gold | COMEX gold futures briefly spiked to a new all-time high before pulling back. |
U.S. Dollar Index | Weakened before the cut and remained stable after the decision was announced. |
Summary of Expert Opinions
The views of over 15 mainstream brokerage firms show a high degree of consensus, but also clear divergences [4]:
Consensus: It is widely believed that this rate cut was "in line with expectations" and marks the beginning of a new "precautionary rate-cutting cycle." Most institutions predict that the Fed will make two more 25-basis-point cuts within the year.
Divergence: Significant disagreements exist regarding the future interest rate path, the long-term pace of cuts, and the outlook for the U.S. economy (soft landing vs. stagflation-like conditions). For instance, Zheshang Securities considered Powell's "risk management" framing to be hawkish, while CICC warned that excessive easing could trigger "stagflation-like" risks.
Goldman Sachs's In-Depth Analysis
Goldman Sachs's analysis is quite representative. Its report states: "As long as the U.S. economy does not fall into recession, rate cuts are bullish for U.S. stocks." [5] The firm believes that the future impetus for the stock market will shift from "valuation expansion" to "earnings growth." Based on a review of historical data, Goldman Sachs found that during "non-recessionary rate cut" cycles, the S&P 500 has consistently recorded significant positive returns in the 6 to 12 months following the initial cut. At the same time, Goldman Sachs noted that although the stock market is at a high, investor positioning is generally light, providing tactical upside for the market. Accordingly, it raised its 12-month price target for the S&P 500 to 7200.
IV. Conclusion and Outlook
In summary, the Federal Reserve's recent rate cut is the result of a delicate balancing act between its dual objectives of inflation and employment. Faced with growing downside risks in the labor market, the Fed has chosen to adopt a preemptive "risk management" strategy, sacrificing a hardline stance on short-term inflation control to provide a cushion for an economic "soft landing." Powell's statement about the "shift in the balance of risks" accurately encapsulates the core logic of this decision.
Looking ahead, although the market widely expects further rate cuts this year, dissent within the Fed, the challenge of sticky inflation, and global economic uncertainty have cast a fog over the future path of monetary policy. Investors and policymakers will need to pay close attention to subsequent economic data, especially the evolution of employment and inflation, to determine which way the Federal Reserve's "balance of risks" will continue to tilt.
References
[1] Federal Reserve. (2025, September 17). Transcript of Chair Powell's Press Conference September 17, 2025. Retrieved from https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20250917.pdf
[2] Trading Economics. (2025). United States Inflation Rate. Retrieved from https://zh.tradingeconomics.com/united-states/inflation-cpi
[3] Wall Street Insights (wallstreetcn.com). (2025, September 17). Powell: Calls for 50-basis-point rate cut not high, downside risk to employment becomes a substantive risk. Retrieved from https://wallstreetcn.com/articles/3755796
[4] Sina Finance. (2025, September 19). What are the effects of the Fed's rate cut? Understanding the interpretations of 15 brokerages in one article. Retrieved from https://cj.sina.com.cn/articles/view/1651428902/626ece2602001d4k4
[5] Wall Street Insights (wallstreetcn.com). (2025, September 21). Goldman Sachs: As long as the US economy does not enter a recession, rate cuts are a positive for US stocks. Retrieved from https://wallstreetcn.com/articles/3755987
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