The Federal Reserve cut its benchmark interest rate by a quarter percentage point on Wednesday, lowering the federal funds rate to a range between 4.00 percent and 4.25 percent in response to weakening labor market conditions and easing concerns over inflation, capping one of the most politically charged meetings in the central bank’s recent history.
In addition, a narrow majority of Fed officials indicated that they expect two more cuts this year, suggesting a quarter-point cut at each of the Fed’s two remaining meetings in October and December this year.
The cut on Wednesday followed months of pressure from President Trump for the central bank to lower borrowing costs.
“Recent indicators suggest that growth of economic activity moderated in the first half of the year. Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated,” the Fed said in a statement released at the conclusion of its two-day monetary policy meeting.
At a press conference following the announcement, Fed Chairman Jerome Powell said that the Fed now expects less inflationary pressure from tariffs than it did a few months ago.
“The pass-through of the tariffs into inflation has been slower and smaller, the labor market has softened, so that the case for their being a persistent inflation outbreak is less,” Powell said.
The decision marked the Fed’s first rate reduction since December 2024 and represented a significant policy shift after officials held rates steady throughout the first half of 2025 due to concerns about tariff-induced inflation that never materialized.
The vote was not unanimous, with Fed Governor Stephen Miran dissenting from the majority decision, preferring a larger one-half a percentage point cut. Governors Christopher Waller and Michelle Bowman, who dissented from the Fed’s decision not to cut rates in July, both voted with the majority. Fed Chairman Jerome Powell said there was not widespread support for a bigger cut.
New economic projections of Fed officials were released along with the decision to cut rates. The new projections show that the median projection of officials now indicates slightly more economic growth this year and two more rate cuts this year, bringing the total to three cuts and an effective rate of 3.6 percent. The prior projections, released in June, reflected an expectation of a total of two cuts in 2025, which would bring the effective rate to around 3.9 percent.
The so-called “dot plot” of the projections, which mark the interest rate expectations of officials but keep the identity of those officials anonymous, showed a major shift. In June, just two out of 19 officials expected the Fed’s benchmark to be in a range of 3.75 percent and 3.50 percent, with all other officials expecting the benchmark to be higher. Now nine officials say they expect the rate to be reduced to that range, with one other official expecting an even lower rate of between three percent and 2.75 percent.
Six officials, however, said they expect no additional cuts this year, highlighting the deep divisions among the Fed’s top officials. One indicated an expectation for Wednesday’s cut to be reversed. Two officials registered an expectation for one additional cut.
The median projections for inflation, core inflation, and the unemployment rate this year were unchanged. The projections for next year show slightly higher growth and inflation, and slightly lower unemployment. The Fed released new projections at the conclusion of every other meeting of the Federal Open Market Committee, the Fed’s rate-setting panel.
Payroll gains have averaged just 29,000 over the three months ending in August, down sharply from earlier estimates and raising concerns about a potential economic downturn, sparking concerns that the Fed’s restrictive policy stance was putting economic growth at risk. Several of the most interest rate-sensitive sectors of the economy, most notably housing, have been in a slump for months.
The meeting unfolded amid extraordinary political drama, with newly confirmed Fed Governor Stephen Miran taking his seat at the policy table for the first time after being sworn in Tuesday morning. Miran, who is on unpaid leave as chair of the White House Council of Economic Advisers, is widely seen as representing President Trump’s latest attempt to break the groupthink consensus at the Fed that critics say has led the central bank to repeatedly miscalibrate monetary policy.
Also attending was Fed Governor Lisa Cook, who participated despite ongoing legal challenges to President Trump’s attempt to remove her from the board over disputed property transaction allegations. A federal appeals court ruled late Monday that Cook could continue serving while her lawsuit proceeds. The Trump administration is expected to file an appeal of that ruling later this week.
The labor market deterioration has been more pronounced than many officials anticipated when they last met in July. At that time, unemployment was lower and hiring appeared more stable. Since then, data revisions have shown job growth was weaker than initially reported, and for the first time since the pandemic recovery began, there are now more unemployed workers than available job openings. Revised data for June showed that payrolls contracted for the first time since 2020.
The rate reduction should provide some immediate relief to borrowers with variable-rate debt, including credit cards and some business loans. Mortgage rates had already declined in anticipation of Fed cuts.
Consumer prices rose 2.9 percent in August from a year earlier, the fastest pace since January. But most of the inflation this year has come from the services sector, with little evidence that tariffs have broadly pushed up consumer prices. Instead, tariffs appear to have pushed up some categories of prices—such as furniture—but these have been short-lived increases offset by disinflation in other categories.
Despite this, at his press conference Wednesday, Powell said that the increase in the pace of inflation this year was mostly due to higher inflation in goods prices.
“We have begun to see goods prices showing through into higher inflation, and actually the increase in goods prices, accounts for most of the increase in inflation, or perhaps all of the increase in inflation over the course of this year,” Powell said, adding that he expects inflationary pressure from tariffs to build over the course of this year and next year.
In response to a question from a reporter, Powell added that the Fed’s expectation is that while inflation will move up this year due to the effects on goods prices from tariffs, those are expected to be “a one-time price increase as opposed to creating an inflationary process.”
Powell said that lower job growth is mostly due to changes in immigration policy bringing down the growth of the supply of workers. At the same time, the demand for workers from businesses has slowed.
“There’s very little growth, if any, in the supply of workers. And at the same time demand for workers has come down quite sharply, to the point what I have called a ‘curious balance,’” Powell said.
The Fed said that its decision reflects the Fed’s dual mandate to maintain both price stability and full employment. With inflation showing signs of persistence while the job market weakens, officials face a challenging balancing act in the months ahead.
Looking forward, the central bank will have two more meetings this year, in October and December, where additional rate cuts remain possible depending on economic developments.
The meeting represented a significant test for Powell, who faces the end of his term as chair in May 2026. Trump has publicly criticized the Fed’s reluctance to cut rates more aggressively and has indicated plans to replace Powell when his term expires.
The political tensions surrounding the meeting highlighted broader concerns about the Federal Reserve’s independence from political influence, a principle that has traditionally guided the central bank’s operations since its founding more than a century ago. Many critics of the Fed say that the central bank has allowed its skepticism about the prudence of Trump’s trade policies to interfere with its judgment when it comes to monetary policy.
The decision to begin cutting rates now reflects growing concern that employment conditions require more support from monetary policy. However, officials remain cautious about committing to a predetermined path of rate reductions, emphasizing the need to remain flexible as economic conditions evolve.
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