Federal Reserve Lowers Rates by 0.25%, Plans Further Cuts This Year
The Federal Reserve lowered interest rates by a quarter of a percentage point on Wednesday and signalled plans for further reductions throughout the year. This move, largely supported by most of the central bank appointees aligned with the current administration, was a response to signs of weakening in the labour market.
Stephen Miran, who was recently sworn in as a Fed governor and is currently on leave from his role as head of the White House’s Council of Economic Advisers, was the sole dissenter, advocating for a larger half-percentage-point cut.
This rate reduction, along with projections anticipating two additional quarter-point cuts at upcoming policy meetings, suggests that officials are now prioritising concerns about slowing economic growth and rising unemployment.
The decision marks the first rate cut by the Federal Open Market Committee since December, bringing the target range to 4.00%–4.25%.
“In the near term, risks to inflation are tilted to the upside and risks to employment to the downside, a challenging situation” for monetary policymakers, Fed Chair Jerome Powell said during a press conference following the meeting. “It’s really the risks that we’re seeing to the labor market that were the focus of today’s decision.”
Powell noted that recent job creation is insufficient to keep unemployment steady, and with minimal hiring activity by businesses, any increase in layoffs could quickly lead to higher unemployment.
“The labour market is softening and we don’t need it to soften anymore,” he added.
New Fed economic forecasts indicate inflation is expected to end the year at 3%, above the central bank’s 2% target, unchanged from projections made in June. Unemployment is projected to hold steady at 4.5%, while economic growth estimates were slightly revised upward to 1.6% from 1.4%.
Markets initially reacted with a brief rise in stocks following the announcement, but they ultimately closed mixed, while the dollar strengthened modestly against major currencies. Treasury yields remained largely steady, and futures markets now show over a 90% chance of another rate cut at the Fed’s next meeting in late October.
Compared with previous forecasts that reflected concerns about stagflation and slower rate cuts to contain inflation, the latest projections reveal a shift among officials. They now believe they can mitigate unemployment risks by reducing rates more aggressively, while inflation is expected to ease gradually next year.
Officials have increasingly accepted the view that the tariffs introduced earlier in the year will only have a temporary effect on inflation, and the recent forecasts support this perspective.
“Since April, to me, the risks of higher and more persistent inflation have probably become a little less, and that’s partly because the labor market has softened, GDP growth has slowed,” Powell said.
The administration implemented significant tariff hikes in early April but has since rolled many back.
The decision to pursue a more consistent path of rate cuts received backing from Fed Governor Christopher Waller and Vice Chair for Supervision Michelle Bowman, appointees aligned with the current administration who had dissented in July when the Fed chose to keep rates unchanged.
Miran dissented regarding the magnitude of the cut and appears to favour steeper reductions in future projections issued after his recent appointment. In the latest “dot plot” of rate forecasts, one projection stands out at 2.875% for the end of 2025—substantially lower than the next closest projection. The administration has pushed for significant rate cuts.
Among those supporting the policy was Fed Governor Lisa Cook, who attended the meeting despite efforts by the administration to remove her, and after courts upheld her challenge to that attempt.
