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Going into today’s meeting, we expected that the Fed would lower interest rates. Today’s widely anticipated 25 basis-point cut reflects continued concern for the labor side of the Fed’s mandate, especially after seeing sticky inflation persist in the September CPI report. Still, we maintain our view that they have a limited window to continue cutting.

Perhaps, the most interesting takeaway from today’s meeting was not the rate cut itself but the question of how the Fed will navigate a growing data visibility problem heading into December’s meeting. Chair Powell himself acknowledged the possibility of a pause, stating, “What do you do if you are driving in the fog? You slow down!”

The government data void means a December pause is on the table  

We did not hear Powell describe the Fed as being data dependent today – and we think that was intentional in this unprecedented period where official government data is not getting published. In fact, Powell was noncommittal regarding the plan for the next meeting, acknowledging, “A further reduction in the policy rate at the December meeting is not a forgone conclusion. Far from it. Policy is not on a preset course.” RBC’s forecast calls for a December pause, as we expect mounting inflation pressures and visibility challenges will make justification for a third consecutive cut increasingly challenging. While we do expect to see some weakness in the labor market persist, we forecast the trajectory of inflation will deviate further from its target relative to the unemployment rate.

The Fed continues to grapple with two-sided risks against a stagflation lite backdrop

Powell once again acknowledged that “there is no risk-free path” to policy with both sides of the mandate increasingly in tension.  “We have a situation where the risks are to the upside for inflation and to the downside of employment. We have one tool. We can’t…address both of those at once.“

Last month’s meeting signaled a clear bias to the labor side of the mandate. As Powell put it, “After the July meeting, we saw downward revisions in job creation, and we saw a very different picture of the labor market and suggested there were higher downside risks to the labor market than we had thought. That suggested the policy…needed to move more in the direction over time of neutral.” However, since the September meeting, state-level jobless claims and job posting data suggest the labor market has stabilized, as Powell noted, “we do not see the weakness…in the job market accelerating.”

But we anticipate that mounting inflation risks may soon derail the Fed’s ability to continue lowering interest rates. While we saw a slight moderation in core CPI in September, at 3% y/y it remains uncomfortably hot. And with the absence of the PPI data this month, we have a limited view into the pipeline of price pressures – something Powell acknowledged could be cause for inflation forecast adjustments.

Rate cuts may do little to solve structural and policy challenges

Coming out of today’s meeting, we wonder whether monetary policy is the appropriate tool to solve structural labor supply shortages and tariff shocks – we think not.

On one side of the mandate, labor demand has weakened as businesses operate in a low-hiring, low-firing environment. The question in our minds is: how much of this stems from uncertainty paralysis due to ever-changing trade policy? Put simply, when businesses face significant uncertainty, they typically do not ramp up hiring or make significant investments.

Moreover, Powell listed both declining labor force participation (which we attribute to retirements) and declining immigration as limiting the supply of available workers. To us, this issue is largely a supply side story. While lower rates may support demand for labor, “some people argue this is supply,” as Powell flagged, “and we really can’t affect it much with our tools.”

On the other side of the mandate, we expect tariff inflation will continue to show up in the core goods data in the months ahead. What stood out to us today was the way in which Powell seemed to shift his characterization of tariffs as being transitory – in fact this was the first presser in 2025 that we did not hear him use transitory to describe the impact: “The reasonable base case is that the effects on inflation will be short- lived, a one-time shift in the price level, but it is also possible that the inflationary effects could, instead, be more persistent, and that is a risk to be assessed and managed.”

The K-Shaped economy means there is no “one size fits all” solution

As we head into 2026, we expect the Fed will be increasingly bound by the challenges of the K-Shaped economy, whose existence Powell himself acknowledged today. He pointed to earnings calls of large consumer-facing companies to highlight an increasingly bifurcated economy, one where “consumers at the lower end are struggling and buying less and shifting to lower-cost products.” Conversely, spending by higher-income and wealthier households remains robust. We expect to see a resilient consumer backdrop in 2026, largely driven by tailwinds that disproportionately benefit the upper end of the “K.”

Still, the reality remains that the prospect of rising inflation is going to more significantly impact low-income consumers. And while lower interest rates could mean slightly lower debt servicing costs, the question is: will another 25bp cut this year really make a difference?   

About the Authors

Mike Reid is a Senior U.S. Economist at RBC. He is responsible for generating RBC’s U.S. economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.

Carrie Freestone is an economist and a member of the macroeconomic analysis group. She is responsible for examining key economic trends including consumer spending, labour markets, GDP, and inflation.

Imri Haggin is an economist at RBC Capital Markets, where he focuses on thematic research. His prior work has centered on consumer credit dynamics and treasury modeling, with an emphasis on leveraging data to understand behavior.