EM LATAM CREDIT: Volcan: New 7-Year Fair Value

On inflation, Powell said “since April, to me, the risks of higher and more persistent inflation have probably become a little less… We continue to expect it to move up, maybe not as high as we would have expected it to move up a few months ago. The passthrough of the tariffs into inflation has been slower and smaller. The labor market has softened. So the case for there being a persistent inflation outbreak is less.” 

• On whether the Fed would have cut earlier in the year had they known payrolls would be substantially revised lower: “We have to live life looking through the windshield rather than the rear view mirror, as you know, and all I can tell you is we see where we are now and we take appropriate action. And we took that appropriate action today.”
• All of that sets up what, as Powell said, would be a meeting-by-meeting approach. It’s possible we could get more sensitivity to individual releases, as there aren’t many major ones ahead of the next decision at end-October (one CPI, one nonfarm payrolls). A stronger-than-expected employment report in particular could see conviction on an end-October cut dissipate quickly. As such the 85+% priced 25bp cut at that juncture may be on the high side depending on one’s forecasts for the monthly data.

• Powell said that while a move “toward the direction of neutral” was warranted, when asked, he wouldn’t commit to saying that an exit from restrictive policy was warranted. He said that “I don’t think we can say we can say that. What we can say is this, that over the course of this year, we’ve kept our policy policy at a restrictive level, and people have different views, but a clearly restrictive level, I would say so… [earlier in the year] the risks which were clearly tilted toward inflation, I would say they’re moving toward toward equality. Maybe they’re not quite at equality. We don’t need to know that. But we do know that they’ve moved meaningfully toward greater equality - the risks between the two goals. And that suggests that we should be moving in the direction of neutral. And that’s what we did today.”
• His comments on labor market risks warranting policy easing somewhat echoed last year’s August “pivot” ahead of the start of easing, saying “we see that that the labor market is softening and we don’t need it to soften anymore, don’t want it to.” But it was much less emphatic than in August 2024 when he presaged a 50bp cut the following month: “We do not seek or welcome further cooling in labor market conditions…We will do everything we can to support a strong labor market as we make further progress toward price stability."
• And while he said that he could “no longer say” that the labor market was in “solid” condition, he also said that the Committee wasn’t so worried about recent labor market developments that they considered a 50bp cut at the meeting (“there wasn’t widespread support at all”). 

The Fed resumed its easing cycle with the first cut of the year September, of 25bp to a range of 4.00-4.25%. That decision was expected, but the lack of conviction on the FOMC about the rate path forward was a key theme of the September meeting’s release materials, as well as Chair Powell’s press conference. Despite a lower rate path signaled in the new Dot Plot, a seeming lack of clarity on delivering those future rate cuts saw an early dovish market reaction subsequently reverse.

• The decision to cut was unanimous (there had been risks of a dissent in favor for a hold), with the lone dissent coming from new Gov Miran who unsurprisingly opted for a 50bp cut. That may have suggested a Committee that was unified in a newfound dovish tilt, but that impression was called into question by the Statement, Dot Plot, and Press Conference.
• As fully expected, the statement revised the description of labor market conditions to reflect weaker conditions and mounting risks to the downside, which were of course the key factor that spurred the Fed to cut. But the projections actually showed stronger growth compared with the last quarter’s projections, no deterioration in the labor market (actually a lower end-2026 unemployment rate), and higher inflation through end-2027 (see section below), with no return to target until end-2028. And the statement took the time to add language noting that inflation had moved up, which it hasn’t said for several iterations.
• Overall those findings didn’t quite square with a downward shift in the end-2025 rate medians in the Dot Plot, which now reflect a total 75bp in cuts this year (50bp prior), in addition to another 25bp cut in 2026. We go into details on the various shifts in the Dot distribution later in this review, but while there was a clear dovish shift on rates, the distribution of outcomes remained wide and fairly bifurcated. (We also had to wonder whether, if Gov Kugler had stayed on for this meeting as opposed to Miran, the 2025 median would have tilted toward only one further cut.)
• Powell may have best summed up the decision to cut rates with “I think you could think of this in a way as a risk management cut”. Powell said that the Committee’s diverse opinions on the rate path ahead - as encapsulated by a wide dispersion in the Dot Plot and a continued split on year-end 2025 rates – reflected difficult choices that would have to be addressed on a “meeting-by-meeting” basis: “it's not a bad economy or anything like that. We've seen much more challenging economic times but from a policy standpoint… it's challenging to know what to do…there are no risk-free paths now. It's not incredibly obvious what to do, so we have to keep our eye on inflation. At the same time, we cannot ignore and must keep our eye on maximum employment.”