FOMC Preview: A Cut and So What

The FOMC will cut rates 25 bp Wednesday. We expect the 2025 “dot plots” to be revised to show three cuts, not two. We expect 2026 and 2027 to each build in an additional cut, not meeting market expectations that the funds rate will be below 3% by 2026, which embeds a recession call the Fed will not want to ratify. The Fed will be moved by troubling jobs data, but we don’t think it rises yet to the level of indicating recession. June’s contraction in payrolls, based on revisions, is a necessary condition, but not sufficient, especially with S&P 500 forward earnings estimates soaring. It arises because of the mass self-deportation of immigrants, leaving the labor market not slack -- as in recessions -- but tight, as the labor force struggles to fill the positions vacated by them. The payrolls benchmark revision has become an annual ritual with no predictive power. The bump in jobless claims is directionally troubling, but of small magnitude. This week’s rate cut will have little economic importance, because the economy is not acting like it needs it.