Key Takeaways

  • The Federal Reserve cut its benchmark interest rate by 25 basis points to a range of 4% to 4.25% on Wednesday and projected two additional 25-basis-point cuts this year, citinga weakening labor market。
  • According to the median forecast, Fed officials expect tothe federal funds rateto 3.6% by the end of 2025, 0.3 percentage points lower than the June forecast. At the same time, they raised their economic growth forecast for this year to 1.6% from 1.4% in June but left their year-end unemployment and inflation forecasts unchanged.
  • Fed Chair Jerome Powell said after the meeting that the unemployment rate has "moved up, job growth has slowed, and downside risks to employment have increased," while Governor Stephen Miran dissented, advocating for a 50-basis-point cut. Powell added, "At the same time, inflation has picked up recently and remains relatively elevated," highlighting the policy challenge of balancing a cooling labor market against rising price pressures.

In-Depth Analysis

Policymakers made their first rate cut since 2025 as concerns over declining hiring prompted them to pause their long-running fight against inflation, which targets 2%.

In recent weeks, the labor market has flashed multiple warning signs.

The U.S. Bureau of Labor Statistics announced last week that employment growth data for the 12 months through March will be subject to a record revision,with nonfarm payrolls potentially revised down by 911,000, a decrease of 0.6%, the bureau said in its preliminary report.

Additionally, overall U.S. hiring declined in August, and the unemployment rate rose to 4.3% from 4.2% in July,the Labor Department reported this month。

Meanwhile, inflation accelerated to its fastest pace of the year last month. The consumer price index rose 0.4% month over month in August,and 2.9% year over year, compared with a 0.2% monthly increase in July, the Bureau of Labor Statistics reported last week.

According to the median estimate, Fed officials expect the unemployment rate to be 4.5% at the end of 2025, unchanged from the June forecast. They expect their preferred inflation gauge—the core personal consumption expenditures price index, which excludes volatile food and energy prices—to be 3.1% by year-end, also in line with the June forecast.

The current combination of accelerating inflation and slowing hiring makes it more complicated for the Fed to fulfill its dual mandate from Congress of stable prices and maximum employment.

"In the near term, inflation risks are tilted to the upside and employment risks to the downside—that's a challenging situation," Powell said. "As downside risks to employment have increased, the balance of risks has shifted."

Powell said the unusually high stakes for the dual mandate have led central bank officials to express a wider range of opinions on policy solutions.

"This is a very unusual situation," he said. "Usually, when the labor market is weak, inflation is low; when the labor market is strong, that's when you need to worry about inflation. So we face two-sided risks, which means there is no risk-free path, and it's quite difficult for policymakers. It's not surprising that there are different views."

Powell noted that despite the complex policy options, Fed officials are managing borrowing costs for a relatively healthy economy.

"The unemployment rate is 4.3%, and economic growth is 1.5%, so the economy is not bad," he said. "We've been through more challenging economic times."

President Donald Trump has posed another source of pressure on Powell for months, berating him as incompetent and calling for the federal funds rate to be cut to as low as 1%.

Trump and Senate Republicans rushed through the confirmation of Miran to fill a vacant Fed governor seat, with Miran serving until January while on leave as Trump's chief economic adviser.

Trump has also sought to remove Fed Governor Lisa Cook, accusing her of violating the law when she signed mortgages before joining the central bank. A federal appeals court on Monday upheld an injunction allowing her to participate in Fed policy meetings.

Powell dismissed suggestions that Fed officials might yield to political pressure.

"Look, acting on data and not considering other factors is deeply ingrained in our culture," Powell said. "Everyone at the Fed strongly identifies with that."

"We don't conceive of or view these issues through the lens of political outcomes at all," he said.

Powell disagreed with Miran's recent claim that presidential tariffs have not pushed up inflation.

"Higher tariffs have begun to push up prices in some goods categories, but their overall impact on economic activity and inflation remains to be seen," Powell said.

"A reasonable baseline scenario is that the effect on inflation is relatively transitory—a one-time move in price levels," he said. "But it's also possible that the inflation effect could be more persistent, and that's a risk to assess and manage."

At his nomination hearing before the Senate Banking Committee on September 4, Miran said that despite the highest import tariffs since the 1930s,prices of imported goods have fallen rather than risen。

"Imported goods have actually become cheaper relative to domestic goods, contrary to expectations that tariffs are inflationary," Miran said.