The Federal Reserve made the first interest rate cut of 2025 on September 17, with the decision makers reducing the benchmark rate to 4%-4.25% as the worrying economic aspect is no longer inflation, but now the number of weak points in the labor market is increasin,g even though the 10-year Treasury yield is floating around 4.1% amidst the expectation of further interest rate cuts.
The shift in the policy is pushed by the liberalization of the labor market
The change of the economic environment was noticed by Fed Chair Jerome Powell in the Wednesday announcement, where the latter said that the labor market is actually cooling down. It is a turning point in the battles against inflation because now the Fed has to deal with the employment problems that it has been raising as the main economic threat.
The 4.3 percent of the unemployed as of August is the highest since the pandemic between September 2017 and November 2020. To worsen the situation, the long-run unemployment is at its highest point of 1.9 million individuals, which is synonymous with 25.7 percent of the total number of unemployed individuals, the highest in February 2022.
The August jobs report showed that it was only able to create 22,000 jobs, which is a very low estimate compared to what the economists projected. The economy has been able to generate 598,000 jobs in the first eight months of 2025, as compared to 1.4 million in the first eight months of 2024. Moreover, the first unemployment benefits also increased by 27,000 to 263,000 as of the end of the week on September 6, which implied that more layoffs were on the rise.
Inflation is complicated by tariff pressure
The weakness in the labor market has seen inflation crawling slowly up since April ,when President Trump announced far-reaching tariffs. Consumer prices have increased by between 2.3 and 2.9 percent in August compared with August, which is above the 200-percent target of the Fed, a complicated balancing act by the policymakers.
On the one hand, these price increases are being driven by tariff-sensitive commodities, and clothing prices have increased by 0.5% and grocery prices by 0.6% in August. Import duties have contributed greatly to the gains made in coffee prices. The poor households are disproportionately affected since they consume more foreign goods, which are usually subject to tariffs. Phillip Swagel of the Congressional Budget Office has observed that the tariffs introduced by Trump have raised inflation beyond the expectations of the analysts, despite the overall economic activity being undermined.
Fed indicates a slow pace towards the future
The rate cut was by a vote of 11-1, with the new governor, Stephen Miran, dissenting to the move, and suggesting what would otherwise be quite a drastic half-point reduction. Miran joins the Fed in a very peculiar dilemma, where he continues serving the office of the White House as the chair of the Council of Economic Advisers on unpaid leave.
Federal officials indicated two additional quarter-point cuts in 2021, though seven of the twelve committee officials claimed that the rates would not drop further in 2025. In October and December, the committee will again meet to assess the economic conditions. These reductions would bring the federal funds rate into the 3 percent zone, and could potentially reduce the 30-year mortgage rates, which are currently averaging 6.35 percent, to 5 percent.
Despite this pressure, Powell made certain that the Fed is independent, and he said that there is no easy way of coming up with decisions regarding the current policy. The Fed is working on a thin margin of achieving a soft landing, which will not lead to recession, and at the same time, will not lead to a renewal of inflation. With price pressures becoming increasingly difficult due to tariff pressures, the policymakers have an arduous task to balance employment and price stability in an ever-complex economic situation.