The Federal Reserve cut interest rates by 25 basis points on Wednesday, marking its first policy easing in nine months and signaling a cautious shift toward further reductions this year. The move brings the benchmark federal funds rate to a range of 4% to 4.25% the lowest in nearly three years.
Policymakers cited growing concerns over labor market fragility as the key factor behind the decision, even as inflation remains above the central bank’s 2% target. Payroll growth has slowed sharply, with recent revisions showing average monthly job gains falling to just 29,000 in the three months through August. The unemployment rate has edged up to 4.3%.
“We’re seeing clear downside risks materialize in employment,” Fed Chair Jerome Powell said at a press conference, underscoring the shift in focus from inflation management to preserving economic stability. Powell noted that while price pressures remain elevated, weakening job creation now poses a more immediate threat.
The decision was backed by 11 of 12 voting members, with Governor Stephen Miran dissenting in favor of a larger half-point cut. Projections released alongside the decision showed a narrow majority of officials expect at least two more cuts this year, pointing to a potential sequence of moves at the Fed’s October and December meetings.
Markets largely welcomed the move. Treasury yields eased, while equity indexes extended recent gains as investors priced in a shallower but more predictable easing cycle. Futures markets are now betting on two additional quarter-point cuts before year-end.
The Fed faces a complicated policy landscape. Elevated services inflation and new tariffs imposed by the White House risk pushing consumer prices higher in the coming months. At the same time, tighter immigration policies may be curbing labor supply, further complicating the Fed’s read of employment data.
Looking ahead, the Fed’s path will depend heavily on incoming data. A softening in consumer spending or further weakness in hiring could accelerate the pace of cuts, while persistent inflation may temper the cycle. With political scrutiny mounting and financial markets sensitive to signals of policy direction, the Fed is likely to tread cautiously through the rest of 2025.
