Fed Holds Rates at 4.5%, Powell Signals September Cut if Jobs Cool

The Federal Open Market Committee voted unanimously to hold the federal funds rate target at 4.25-4.50% at its May meeting, as expected by all 47 economists surveyed by Bloomberg ahead of the decision.

The statement language shifted modestly hawkish on inflation — 'somewhat elevated' replaced the prior 'elevated' — but Chair Jerome Powell's press conference tilted the market interpretation toward an eventual cut. Powell said explicitly that 'two consecutive months of payroll gains below 150,000' would give the committee confidence to reduce rates at the September meeting.

Markets repriced immediately. Fed funds futures moved to price a 78% probability of a 25bps cut in September, up from 51% before the meeting. The 2-year Treasury yield fell 9 basis points to 4.21%.

Based on my analysis of the dot plot, the median projection shows just one cut in 2026 — down from two projected in March. That sets up a potential conflict: markets are pricing more easing than the Fed is projecting, a gap that has historically resolved in favour of the Fed's more cautious stance.