On Wednesday, the Federal Reserve reduced the key federal funds rate by a quarter point in the first decline in nine months as policymakers attempt to boost a faltering job market without the threat of rekindling inflation. The central bank reduced rates to 4-4.25%, stating that there are increased downside pressures on employment, and also stated that inflation is still slightly on the higher side, a performance that has posed a tricky balancing task for the monetary policy.
First rate cut since December
US Federal Reserve policymakers cut their target interest rate today by a quarter point, the first reduction of the year, in a bid to bolster faltering employment without reigniting inflation, according to Argus Media. The Fed’s Federal Open Market Committee (FOMC) on Wednesday cut the federal funds rate to 4-4.25%, down from 4.25-4.5%. The FOMC previously held the target rate unchanged at five meetings this year after three rate cuts late last year.
“Uncertainty about the economic outlook remains elevated,” the FOMC said after its meeting. “Downside risks to employment have risen.” Fed chair Jerome Powell said higher tariffs have begun to push up some prices, but their overall effect on economic activity and inflation remain to be seen. “A reasonable base case is that the effects on inflation will be relatively short-lived,” he said in prepared remarks.
Employment concerns drive the decision
Recent indicators suggest economic growth moderated in the first half of the year, while job gains have slowed and unemployment, while low, has edged up, the committee said. Inflation “remains somewhat elevated.” “Our obligation is to ensure that a one-time increase in the price level does not become an ongoing inflation problem,” Powell said, according to Investopedia. “In the near term, risks to inflation are tilted to the upside and risks to employment to the downside — a challenging situation.”
The Federal Reserve policy committee faces a “challenging situation,” according to Chair Jerome Powell. Powell said there is a risk of lower employment and higher inflation, putting the Fed in a difficult position. The Fed is tasked with keeping unemployment and inflation low. Their main tool for both is the fed funds rate.
Two more cuts are projected this year
The Fed, in its economic projections, penciled in two more quarter-point rate cuts this year in addition to Wednesday’s cut, compared with just two quarter-point cuts projected in June. The Fed’s median projections put personal consumption expenditures inflation at 3 percent at year’s end, unchanged from the June forecast, with unemployment climbing to 4.5 percent by the end of the year, also unchanged from the June outlook.
The CME’s FedWatch tool on Tuesday had given a 96.1% probability of a quarter-point cut on Wednesday, with a 3.9% chance of a half-point cut. Probabilities had also shown 70 percent odds of three-quarters points worth of cuts by year’s end. Rate-cut odds surged after a 1 August employment report showed just 73,000 jobs created in July, with a quarter million jobs cut from revised May and June figures.
Political pressure intensifies
Following the 1 August report, President Donald Trump alleged the jobs data were “manipulated for political reasons,” without providing evidence. He immediately fired the Labor Department’s top statistician and replaced her with an ally from the Heritage Foundation, a conservative think tank. Trump has also intensified his verbal attacks on Fed chair Jerome Powell, repeating his allegations that the Fed has been too slow to cut rates.
The Federal Reserve’s quarter-point rate cut reflects growing concerns about employment weakness while inflation remains above target levels. With two additional cuts projected for this year, policymakers are attempting to navigate between supporting job growth and maintaining price stability. The decision comes amid heightened political pressure from President Trump, raising questions about central bank independence as economic uncertainties persist.