The Federal Reserve announced a highly anticipated interest rate cut Wednesday, a move indicating that concerns about a slowing labor market now outweigh ongoing worries about inflation.
It's the Fed's first rate cut this year. Policymakers opted for a quarter-point cut to the central bank's benchmark rate, in line with expectations. It's now set at 4% to 4.25%.
"The labor market is really cooling off," Fed Chair Jerome Powell said at a news conference Wednesday after the announcement.
The Trump administration has mounted an unprecedented pressure campaign that has included attacks on Powell for not lowering rates sooner, as well as an effort to unseat a Biden-era Fed appointee over accusations of mortgage fraud.
But Powell and the Fed had resisted Trump's pressure, saying its dual mandate of keeping both unemployment and inflation low meant it needed to be careful not to overheat the economy and risk a return to rapidly rising prices.
"We’ve done very large rate hikes and very large rate cuts in the last five years, and you tend to do those at a time when you feel that policy is out of place and needs to move quickly to a new place," Powell said. "That’s not at all what I feel."
The vote for the quarter-point cut by the Fed's rate-setting committee was 11 to 1. The sole dissenter, in favor of a larger half-point cut, was newly appointed governor Stephen Miran. He was sworn in this week even as he maintains his title as chair of the White House’s Council of Economic Advisers, though he is officially on leave from that role.
President Donald Trump's two other appointed governors, Michelle Bowman and Christopher Waller, both voted for the quarter-point cut.
In its statement Wednesday, the Fed indicated it expects two more rate cuts this year. However, seven of the 12 officials on the Fed's rate-cutting committee indicated that rates should remain unchanged for the rest of the year.
The committee will meet again in October and December.
The labor market appears to be slowing dramatically. August’s jobs report showed that just 22,000 jobs were added, far below economists’ expectations. That report also showed that the United States lost jobs in June. So far this year, the economy has added 598,000 jobs, compared with 1.4 million for the first eight months of 2024. The unemployment rate also ticked higher last month, to 4.3%, a level not seen since September 2017 outside of the Covid-19 pandemic.
At the news conference, Powell called the labor market “unusual,” noting that fewer firms are hiring — but that the available supply of workers is also declining because of Trump’s immigration crackdown.
Lower rates could help businesses hire as it becomes less expensive to take out loans and credit card rates fall for consumers.
At the same time, inflation has been creeping up. Since April, when Trump announced his sweeping “reciprocal” tariffs, inflation has increased from 2.3% to 2.9% in August. The Fed’s inflation target is 2%.
Fed officials said in a separate set of economic projections that they see two additional quarter-point rate cuts this year and a third in 2026.
“After weak July and August employment reports and a large negative preliminary benchmark revision, job growth now appears to be much lower and below the breakeven rate, the risks still tilt toward further negative revisions, the unemployment rate has risen slightly for two months in a row, and our broader measure of labor market slack has risen a bit more,” Goldman Sachs economists wrote.
Heading into Wednesday, markets were pricing in a high likelihood of a total of three-quarters of a percentage point in cuts by the end of the year.
In recent interviews and earnings calls, companies have also flagged slower spending by a large chunk of the population.
McDonald’s CEO Chris Kempczinski called it a “two-tier economy” in a CNBC interview this month. While upper-income households continue to spend freely, “middle- and lower-income consumers, they’re feeling under a lot of pressure right now.”
Several prominent economists aren’t convinced a Fed cut is warranted at this point. Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, noted last month that inflation was still lingering above the Fed’s 2% target even before Trump’s tariffs. “Price pressures are likely to pick up in coming months as businesses are forced to pass on higher tariff costs to protect their profit margins,” he said.
Stock markets are thriving, too.
“It’s not unprecedented for the Fed to ease when stocks are at or near all-time highs,” JPMorgan Chase chief U.S. economist Michael Feroli said in early August. “It’s rarer when stocks are at the highs and inflation is above target and inflecting higher.”
This Fed meeting is also the first with Miran, the newly confirmed governor, who joins the Fed under highly unusual circumstances. Members of the independent central bank historically haven’t held other outside roles during their tenures. Miran is on unpaid leave from the economic advisers council and could return to the White House when his Fed term concludes at the end of January. The administration has sought to downplay the arrangement.
“I don’t think there’s anything irregular about it at all,” Treasury Secretary Scott Bessent said Tuesday on CNBC.
“Everyone knows that he’s going back” to the White House, “so I think cards on the table it’s actually much more transparent,” Bessent added.
The Trump administration has sought to further increase its influence on the Fed by trying to fire Lisa Cook, the first Black woman to work on the board of governors, over allegations of mortgage fraud. Cook hasn’t been charged with a crime. An appeals court has ruled she can’t be removed while she sues the administration over its attempt to terminate her. For now, Cook remains in place.
It all comes after months of attacks from Trump. Seeking lower rates, he and others in his administration have hammered Powell with personal insults and have said the entire Fed board should be “ashamed” of its work.
But Powell has maintained that the Fed must remain cautious.
"We’ve seen much more challenging economic times, but from a policy standpoint ... it’s challenging to know what to do," Powell said Wednesday. "There are no risk-free paths."
