The Federal Reserve cut its benchmark interest rate by a quarter-percentage point on Wednesday, a move prompted by signs of a weakening labor market. The decision lowers the federal funds rate to a target range of 4.0% to 4.25% and marks the first reduction since late 2024, ending a nine-month period of holding rates steady.
The rate cut, which is expected to be the first in a series of reductions aimed at lowering borrowing costs for consumers and businesses, follows a series of disappointing jobs reports. The U.S. economy added just 22,000 jobs in August, pushing the unemployment rate to 4.3%, its highest level since October 2021. Furthermore, previous jobs data was revised down significantly, including a loss of 13,000 jobs in June, the first monthly decline since December 2020.
While the central bank typically holds or raises rates to combat inflation, this move signals a pivot toward stimulating the economy. The Fed acted despite inflation remaining above its 2% target, with the consumer price index rising a modest 2.9% in August. Fed Chair Jerome Powell has previously suggested that tariffs might cause a one-time price shift rather than persistent inflation.
The decision was not unanimous. Newly appointed Governor Stephen Miran, in his first meeting, dissented in favor of a more aggressive half-percentage-point cut. The meeting also included Governor Lisa Cook, who participated after an appeals court allowed her to continue her duties while she contests President Donald Trump’s attempt to remove her from the board. These developments have heightened concerns over the central bank’s political independence amid the president’s calls for aggressive rate cuts.
Looking ahead, economists and investors will closely scrutinize the Fed’s updated quarterly projections, or “dot plot,” for indications of future rate movements. According to a recent Bloomberg survey, economists are split on whether to expect two or three total cuts this year.
Ahead of the announcement, Wall Street’s main indexes were subdued. The recent market rally, which saw the S&P 500 and Nasdaq reach record highs, has been fueled by expectations of rate cuts. Investors are now watching to see if the Fed’s actions will be sufficient to help the U.S. economy avoid a significant downturn.
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