US Fed Cuts Rates for First Time Since December, More Easing Likely in 2025

In a much-anticipated move, the US Federal Reserve lowered interest rates on Wednesday for the first time since December 2024. The decision comes amid signs of weakness in the labor market, particularly affecting minority communities and younger workers, and mounting concerns about declining work hours and sluggish hiring.

The central bank reduced its benchmark rate by a quarter percentage point, setting it in the 4.00%–4.25% range, while also hinting at additional cuts in the upcoming October and December 2025 meetings.

Federal Reserve’s Rate Cut Decision

A Response to Rising Joblessness

Fed Chair Jerome Powell emphasized that the primary concern driving the decision was the risk of worsening unemployment. He explained:

“There are no risk-free paths … It’s not incredibly obvious what to do. We have to keep our eye on inflation at the same time, we cannot ignore … maximum employment.”

Powell highlighted that the pace of job creation is falling short of the break-even point required to stabilize the unemployment rate. He added:

“You see minority unemployment going up. You see younger people … more susceptible to economic cycles … in addition to just overall lower payroll job creation that shows you that at the margin, the labor market is weakening. … We don’t need it to soften anymore.”

Political Undercurrents at the Fed

Trump’s Pressure and Appointments

The meeting unfolded amid political drama. President Donald Trump had recently attempted to dismiss Governor Lisa Cook, though courts backed her reinstatement. Trump also appointed Stephen Miran, an adviser from the White House Council of Economic Advisers, to the Fed board.

Miran, sworn in just before the meeting, dissented from the consensus, advocating for a larger half-point rate cut and projecting policy rates below 3% by year-end. His views were reflected in the Fed’s “dot plot” projections, though not directly attributed by name.

Despite Trump’s ongoing criticism of Fed policy, Powell asserted the central bank’s independence, stating:

“It’s deeply in our culture to do our work based on the incoming data and never consider anything else. There wasn’t widespread support at all for a 50-basis-point cut today.”

Inflation vs. Employment: The Balancing Act

Fed’s Changing Priorities

The rate cut marks a shift in the Fed’s priorities. While inflation is projected to remain at 3% in 2025, above the 2% target, policymakers are increasingly focused on stabilizing the labor market.

Ellen Hazen, Chief Market Strategist at F.L. Putnam Investment Management, noted:

“Fed policymakers deemed that the downside risk to employment has increased, and therefore it would seem that they are weighting the labor market more than the higher inflation that they noted in their projections.”

Powell’s Broader Outlook

Powell explained that the significance lies not just in the initial cut but in the broader rate path:

“It was not so much the initial cut that will matter to the economy, but the broader sense of a rate path that moves slightly faster to a stopping point about a quarter of a percentage point lower than officials communicated in June.”

He further added that the Fed is approaching decisions on a “meeting-by-meeting” basis, leaving room for adjustments if inflation trends unexpectedly rise.

Economic Outlook and Market Reaction

New Fed Projections

According to the latest projections:

• Inflation: Expected to end 2025 at 3% (unchanged from June forecast).

• Unemployment: Projected steady at 4.5%.

• Economic Growth: Slightly improved, now estimated at 1.6% vs. 1.4% earlier.

Market Movements

• Stocks: Initially rose on the Fed’s announcement but closed mixed.

• Dollar: Strengthened modestly against a basket of currencies.

• Treasury Yields: Remained largely unchanged.

• Rate Futures: Markets now show a 90% probability of another cut in October.

Consensus Amid Dissent

Board Members’ Stance

Despite Trump’s interventions, most board members—including Trump appointees Michelle Bowman and Christopher Waller—supported Powell’s cautious approach. Waller, who had earlier pushed for stronger focus on employment, aligned with the majority view, reflecting the Fed’s growing concern over slowing payroll growth.

Powell summarized the balancing act facing the Fed:

“We have to keep our eye on inflation at the same time, we cannot ignore … maximum employment.”

Conclusion

The September 2025 interest rate cut underscores the Fed’s evolving priorities. With inflation still above target but signs of labor market stress intensifying, Powell and his colleagues are choosing to prioritize employment stability while carefully monitoring price pressures.

Although political tensions surrounding Trump’s involvement remain in the background, the Fed’s latest decision reflects a measured, data-driven approach aimed at preventing a deeper downturn. As Powell noted, the path ahead remains uncertain, but additional cuts in October and December now appear highly likely.