The Federal Reserve lowered interest rates by 0.25% on Wednesday for the first time in nine months and sees the need two more rates cuts this year as worries of softening in the labor market, which threatens the economy, outweigh concerns about inflation still running above the central bank’s target.
"Recent indicators suggest that growth of economic activity moderated in the first half of the year," the Fed said in its monetary policy statement on Wednesday. "Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated," it added.
The Federal Open Market Committee, the FOMC, lowered its benchmark rate by 0.25% to a range of 4.00% to 4.25%.
The decision comes amid a shakeup at the board of Fed members. The Senate on Monday confirmed President Donald Trump’s economic advisor Stephen Miran to the Federal Reserve’s Board of Governors just in time for him to participate in Wednesday’s rate-cut vote. Miran, who is largely seen in favor of rate cuts, dissented against the decision, backing a 50 basis point.
Against the deepening pro-rate cut backdrop emerging at the U.S. central bank, Fed members tentatively backed two more rates cuts this year, up from the previous forecast for one more. But support for three cuts is far from solid, Morgan Stanley said.
"The SEP showed a median of three cuts for this year, but only just: a shift of one voter to two cuts would have left the median there," it added.
Rates are seen for falling to 3.4% in 2026, down from a prior forecast of 3.4%. For 2027, rates are expected to fall to 3.1%, compared with a prior forecast of 3.4%.
A rate cut was largely expected and priced in for weeks leading up to the meeting. Flagging the shift in risk from the inflation to the labor market, Fed chairman Jerome Powell signaled that the wait and see approach that had kept rate cuts on pause since December 2024 was nearing an end. “The time has come for policy to adjust,” Powell said in remarks at the central bank symposium in Jackson Hole, Wy.
Recent labor market data following the Fed chief’s remarks has fanned those concerns: Payrolls rose just 22,000 in August, fewer than the 75,000 jobs economists had expected, while the unemployment rate rose to 4.3%.
In sign that upside risks to inflation are on the decline, the core personal consumption expenditures price index, the Fed’s preferred inflation forecast, is estimated to be 3.1% in 2025, unchanged from a prior forecast in June of 3.1%. For 2026, inflation is estimated to be 2.6%, up from 2.4% previously, and slowing further to the 2.1% target by 2027, unchanged from the prior forecast.
For the labor market, which is now driving monetary policy decisions, Fed members see the unemployment rate unchanged at 4.5% for this year, and to decline slightly to 4.4% in 2026, down from 4.5% previously. The downtick in unemployment is forecast continue to 2027, with members now expecting a 4.3% unemployment rate in 2027, down from 4.4% previously.
The softer labor market path ahead, however, isn’t reflected in the latest outlook on economic growth. Fed members now see gross domestic product, or economic growth, rising 1.6% this year, up from a prior estimate of 1.4%. For 2026, economic growth is seen rising to 1.8%, up from a prior estimate of 1.6%, and to 1.9% in 20257, up from a prior estimate of 1.8%.
In his press conference that followed the decision, Powell characterized the Fed’s decision to ease as a "risk-management cut." The fed chief also downplayed the idea that the first cut opens the doors to a deep rate-cutting cycle. "I don’t think we can say" that policy no longer restrictive policy
Source :
https://www.investing.com/news/economy-news/fed-cuts-rates-by-025-after-flagging-risks--from-softening-labor-market-4242999
