COLUMN-Heightened uncertainties feed Fed inconsistencies: McGeever

By Jamie McGeever

ORLANDO, Florida, Sept 18 (Reuters) - The Federal Reserve cut interest rates on Wednesday for the first time in nine months, arguing the move is necessary to counter increasing risks to the labor market. The rationale is sound enough. There's only one problem - it seems to clash with many of the U.S. central bank's revised economic projections.

In his press conference following a two-day policy meeting, Fed Chair Jerome Powell stressed that employment risks have risen substantially in recent months and now outweigh inflation risks. However, policymakers lowered their median 2026 and 2027 unemployment rate projections by a tenth of a percentage point to 4.4% and 4.3%, respectively, from three months ago.

How does that add up?

The revised "dot plot" chart of rate projections also showed that Fed officials now expect three quarter-percentage-point cuts this year, up from the two projected in June. But at the same time, officials lifted their median GDP growth projections for this year and next, while also raising next year's inflation outlook.

So, to recap, the Fed is cutting rates and expects to front-load that easing, due to what Powell says are "meaningful" downside risks to the labor market. Yet officials are also penciling in lower unemployment rates than they were three months ago and higher growth and inflation rates.

It's a confusing picture.

'MEETING-BY-MEETING SITUATION'

But this confusion may be the biggest takeaway.

Visibility surrounding the U.S. growth, inflation and employment outlooks is incredibly low, as Powell acknowledged, and the range of policymakers' forecasts has widened.

"From the dot plot to the economic forecasts, there are multiple inconsistencies that raise eyebrows," notes Ron Temple, chief market strategist at Lazard. "The key message ... is that there is not a shared outlook among the FOMC (Federal Open Market Committee) participants."

These inconsistencies may have been exacerbated by the addition of Stephen Miran, the head of President Donald Trump's Council of Economic Advisers, to the Fed's Board of Governors. His was the lone dissenting voice, calling for a 50-basis-point cut, and he also appears to have tipped the scale in favor of projections of more short-term easing.

At the same time, few officials – perhaps with the exception of Miran – seem to hold these views with any real conviction.

"We're in a meeting-by-meeting situation," Powell told reporters, an indication that guidance offered by the dot plot is pretty loose. So it's unclear how committed the Fed even is to this new policy shift out of restrictive territory into a more neutral place.

(IN)VISIBILITY

To be fair to Powell and his colleagues, it is increasingly difficult to interpret the incoming data. The economic models and playbooks of yesteryear often no longer seem relevant to today's economy, as has been proven time and again this year.

Just look at the unemployment rate. Labor market supply and demand are in broad balance, which is why the unemployment rate remains so low at 4.3%. But that's only because the alarming slump in hiring has been offset by the Trump administration's immigration policies and deportations, which are crushing labor supply.

The "breakeven" rate of monthly payrolls growth needed to keep the unemployment rate steady is perhaps around 50,000 now, or even lower, down from around 150,000 earlier this year. The economy only added 22,000 jobs in August.

So it's a "curious balance", according to Powell. And perhaps a dangerously unstable one. If companies' low hiring turns to outright firing, the unemployment rate could shoot higher, even if labor supply remains tight.

Visibility on the inflation side isn't much better. Policymakers' assessment that import tariffs will deliver a one-off price hit with no lasting inflationary effects is based more on hope than expectation. U.S. tariffs are the highest in a century, so this is new territory for policymakers today, and uncertainty surrounding the effect on consumer prices remains substantial.

As a result, there is little clarity on either side of the Fed's mandate. The central bank is nevertheless choosing to put aside inflation fears and focus more on the upside risks to unemployment. Is there justification for this approach? Certainly. But is it the right move? Who knows.

"Tensions within the Fed's dual mandate of price stability and maximum sustainable employment are at the heart of several inconsistencies inside the Fed's rate, growth, inflation and unemployment forecasts," says Joe Brusuelas, chief economist at RSM.

As Powell himself said, this is a "particularly challenging time" for the Fed, as "there are no risk-free paths now" for policymakers. The same can be said for investors.

(The opinions expressed here are those of the author, a columnist for Reuters)