Why would Fed keep cutting rates after this week? Is it because of bad home-building numbers?

As you likely heard, the Federal Reserve's Open Markets Committee met last week and voted to cut interest rates for the first time in 9 months. But to me the more interesting part is the economic projections that the Fed put out along with the statement to lower the Fed Funds rate by 1/4 point. If you look at the Fed’s economic projections, and compare it to the one that they had back in June (which also included their March projections), it shows that they expect GDP growth for 2025 to be slightly more than they did in June (1.6% now and 1.4% in June), but less than the 1.7% that was projected in March. And a similar pattern of “better than June but worse than March” also appears in the Fed’s projections for unemployment.

But in those same projections, the Fed said inflation would stay elevated for this year and that 2026’s inflation will be even higher than they thought in June. And both years are now expected to have notably higher inflation than what was projected in March.

But despite that change in outlook, the Fed is now saying they will do more rate cuts for the rest of this year, and that next year’s interest rates will be the same as projected in March?

How does that make sense, at least in a world where a couple of these Fed officials aren’t trying to get on Donald Trump’s good side by saying they’ll do more rate cuts? Either the real economy is going to be near or in recession to warrant those additional rate cuts, or we are going to see inflation go higher due to higher demand.

Fed statement makes it official: Stagflation is in the room. "Job gains have slowed, and the unemployment rate has edged up... Inflation has moved up and remains somewhat elevated. "

— Justin Wolfers (@justinwolfers.bsky.social) September 17, 2025 at 1:10 PM

Perhaps the Fed is also giving extra attention to the bad news that keeps coming for the housing markets. Home construction continued to decline in August, indicating that the recession in that sector may be worsening.

Privately-owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 1,312,000. This is 3.7 percent below the revised July rate of 1,362,000 and is 11.1 percent below the August 2024 rate of 1,476,000. Single-family authorizations in August were at a rate of 856,000; this is 2.2 percent below the revised July figure of 875,000. Authorizations of units in buildings with five units or more were at a rate of 403,000 in August.

Privately-owned housing starts in August were at a seasonally adjusted annual rate of 1,307,000. This is 8.5 percent (±10.7 percent)* below the revised July estimate of 1,429,000 and is 6.0 percent (±9.7 percent)* below the August 2024 rate of 1,391,000. Single-family housing starts in August were at a rate of 890,000; this is 7.0 percent (±8.2 percent)* below the revised July figure of 957,000. The August rate for units in buildings with five units or more was 403,000.

Privately-owned housing completions in August were at a seasonally adjusted annual rate of 1,608,000. This is 8.4 percent (±19.2 percent)* above the revised July estimate of 1,483,000, but is 8.4 percent (±22.4 percent)* below the August 2024 rate of 1,755,000. Single-family housing completions in August were at a rate of 1,090,000; this is 6.7 percent (±11.7 percent)* above the revised July rate of 1,022,000. The August rate for units in buildings with five units or more was 503,000.

This means multi-year lows for permits and homes under construction, and a lower number of housing starts than we had in any non-COVID month between 2020 and 2023.

Even that increase in completions over the last 3 months isn’t great news, because it reflects projects which were started 1-2 years before then, and we aren’t seeing as many new jobs in the pipeline to keep the demand for work going.

We’ve already seen the construction sector start losing jobs in recent months. Even if you account for the recent (downward) benchmark revisions of job growth, construction still had gains of 104,000 jobs over the 12-month period ending in March. But in the reports since March, construction has lost 8,000 jobs, including losses in each of the last 3 months.

So even though the Fed said little about what seems to be a housing recession, is that a main reason they would continue to cut interest rates, even though rising inflation would indicate that they shouldn't be doing that?