US Fed cuts rate by 25 basis points, indicates two more cuts for the year

Federal Reserve officials voted to lower the benchmark interest rate by a quarter percentage point on Wednesday, marking the first reduction since December.

The move reflects a growing focus on weakness in the labor market, even as inflation remains elevated.

Policymakers also signaled that two additional rate cuts are likely before the end of the year.

A shift toward employment risks

The Federal Open Market Committee (FOMC) voted 11–1 to cut the target range for the federal funds rate to 4%–4.25%, ending a streak of five consecutive meetings with no policy change.

In its statement, the central bank acknowledged that inflation “moved up and remains somewhat elevated,” but emphasized mounting risks to the job market.

Officials noted the unemployment rate has “edged up but remains low,” while also warning that downside risks to employment are increasing.

Recent economic data showed hiring continued to slow in August, with unemployment climbing to 4.3%—the highest level in nearly four years.

The sole dissent came from Stephen Miran, the Fed’s newest member and a Trump appointee sworn in just one day earlier.

Miran advocated for a larger half-point reduction, reflecting a more aggressive stance than the committee’s consensus.

Governors Michelle Bowman and Christopher Waller, who pushed for rate cuts in July, supported the quarter-point move this time.

Projections point to more cuts ahead

Alongside the policy decision, Fed officials released updated economic projections.

They now anticipate two more quarter-point reductions this year—one more than previously signaled in June.

Looking further out, officials see a single cut in both 2026 and 2027.

One member projected the policy rate could fall by as much as 1.25 percentage points by year-end, underscoring the range of views within the committee.

The new forecasts also included a modest upgrade to growth expectations in 2026 and a slightly higher inflation outlook for 2025.

Markets responded swiftly to the announcement.

The S&P 500 climbed, Treasury yields retreated, and the dollar extended losses, reflecting investor confidence that monetary policy is shifting toward looser conditions.

Balancing inflation and political pressure

The decision follows Powell’s remarks at the Jackson Hole symposium in August, where he hinted that a rate cut was on the table amid “shifting balance of risks.”

Since then, inflation data has shown an acceleration, driven in part by tariffs passed through to consumers.

The Fed’s preferred inflation gauge rose 2.6% in the 12 months through July, with another uptick expected when August figures are released.

While some officials worry tariffs may exert persistent upward pressure on prices, others, including Bowman and Waller, view the impact as temporary.

They argue for faster rate cuts to bring policy closer to neutral levels.

The move also comes amid heavy political scrutiny.

President Donald Trump has repeatedly urged deeper rate reductions and is currently seeking to remove Fed Governor Lisa Cook.

His administration’s influence on the central bank was evident with Miran’s immediate participation in the vote.