The U.S. Federal Reserve has reduced its benchmark interest rate by 0.25 percentage points — its first cut since December — and indicated that two additional reductions are likely this year as it pivots from focusing on inflation to shoring up a weakening job market. The move lowers the Fed’s short-term rate to roughly 4.1% from 4.3%.

FED CUT 

For much of this year, policymakers under Chair Jerome Powell kept rates steady while weighing the impact of tariffs, tighter immigration policies, and other Trump administration initiatives on both inflation and overall growth. But the tone shifted at this week’s two-day policy meeting, reflecting mounting concerns about employment.

“In this less dynamic and somewhat softer labour market, the downside risks to employment appear to have risen,” Powell said at a press conference after the decision. Hiring has slowed sharply in recent months, and unemployment has begun to edge up — developments that are pushing the Fed to act sooner rather than later.

Lower borrowing costs could ease pressures on households and businesses alike. Cheaper mortgages, auto loans, and business financing may help revive spending and hiring, even as inflation remains slightly above the Fed’s 2% goal. Consumer prices rose 2.9% in August from a year earlier, up from 2.7% in July, highlighting the unusual combination of tepid job creation and persistent price pressures.

The Fed also outlined its expected path for rates over the next two years. Officials see two more cuts in 2025 but only one in 2026 — fewer than the five reductions investors had pencilled in before the meeting. The announcement may temper Wall Street’s optimism for a rapid easing cycle.

The decision was not unanimous. Stephen Miran, a recent Trump appointee confirmed by the Senate just hours before the meeting began, dissented. Many economists had anticipated more pushback from within the committee, which includes other Trump-era nominees as well as Fed Governor Lisa Cook, whom the White House has moved to remove. Powell nevertheless managed to project a degree of unity, even as deep divisions remain over the rate path.

According to the Fed’s anonymous forecasts, seven officials oppose any further cuts this year, two favour one more, and 10 support at least two additional reductions. One member — widely believed to be Miran — backs a more aggressive approach that would take the policy rate down to 2.9% by year-end. Powell acknowledged that such differences reflect an unusually uncertain backdrop.

“There are no risk-free paths now,” he said. “It’s not incredibly obvious what to do.”

The central bank now finds itself in a delicate balancing act: responding to a cooling labour market without letting inflation become entrenched, all while fending off growing political pressure. Powell has argued that even if tariffs continue to push some prices higher, slower growth could still bring inflation back to target. For the moment, the Fed appears ready to bet that a modest easing of policy can stabilise employment without igniting another bout of price increases.

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