The Federal Reserve announced an interest rate cut by a quarter of a percentage point on Wednesday after its much-awaited policy meeting on September 16. This is the first cut by the policy-setting Federal Open Market Committee (FOMC) since December 2024, and moves the policy rate to the range of 4-4.25 per cent.
The bank also indicated it will steadily lower borrowing costs over the rest of the months in this year as policymakers take a measured approach to spur more borrowing and spending in order to fasten a slumping economy.
"The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen," the Fed said in its policy statement, and added that "job gains have slowed, and the unemployment rate has edged up."
While the bank’s move won support from most of US President Donald Trump’s central bank appointees, only newly-appointed governor on the Fed’s board, Stephen Miran, dissented in favour of a higher, half-percentage-point cut.
Miran joined the Fed on Tuesday and is on leave as the head of the White House’s Council of Economic Advisors.
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The rate cut is, however, a clear indication that Fed officials are now more concerned about weakening growth, as evident in a sharp slowdown in hiring. Worries of the likelihood of rising unemployment must also weigh on the Fed, with the government saying last week that its estimate of job gains for the year ended in March 2025 would likely be revised down by 911,000, a sharp reduction in total employment.
Data revealed that employers actually cut back slightly on their payrolls in June, shedding 13,000 jobs, and added just 22,000 in August.
Investors and economists are looking forward to the Fed Chair, Jerome Powell’s press conference for cues on the bank’s economic policy going forward.
They believe the Fed would reduce rates as many as five times by the middle of next year, bringing its rate closer to a level that neither stimulates nor slows the economy.
Wall Street traders expect at least three reductions this year and then two more by next June, according to futures pricing tracked by CME Fedwatch.
The Fed had reduced borrowing costs three times last year. But, it then put any further cuts on hold to evaluate the impact of Trump's sweeping tariffs on the economy.
Fed officials now seem to have warmed to the idea that Trump’s tariffs would have only a temporary impact on inflation.
While inflation remains stubbornly elevated, partly because tariffs have lifted the cost of some goods, such as furniture, appliances and food, it is expected to ease slowly next year even as rate cuts prevent any further rise in unemployment.
Wednesday’s Fed Res meeting, meanwhile, had the bank’s governor Lisa Cook voting in favour of the rate cut decision.
Cook attended the policy meeting despite Trump’s efforts to fire her. Her removal was halted after two courts supported her challenge of his attempted dismissal.
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