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The Federal Reserve delivered its first interest rate cut of the year on Wednesday, signaling that mounting concerns about a slowing labor market now outweigh the risks of rising inflation.
Policymakers reduced the central bank’s benchmark rate by a quarter percentage point, setting it at 4% to 4.25%. The move was widely expected by Wall Street and marks a cautious but significant shift in monetary policy.
“The labor market is really cooling off,” Fed Chair Jerome Powell told reporters after the decision. “We’ve done very large rate hikes and very large rate cuts in the last five years … that’s not at all what I feel is needed now.”
The decision came amid sustained pressure from President Donald Trump, who has waged an aggressive campaign to force deeper rate cuts. His administration has mounted personal attacks on Powell and sought to remove Democratic appointee Lisa Cook from the Fed board over contested mortgage fraud allegations. Courts have so far blocked that effort.
Divided Fed board
The rate cut passed on an 11–1 vote. The sole dissenter, new governor Stephen Miran, favored a half-point cut. Miran, sworn in just this week, is also chair of the White House Council of Economic Advisers, though currently on leave. His dual role has raised concerns about political influence at the traditionally independent central bank.
Trump’s other appointees, Michelle Bowman and Christopher Waller, backed the quarter-point cut.
Fed projections suggest two more cuts are likely this year, though nearly half of the board’s members signaled they prefer to hold rates steady through December.
Economic warning signs
Recent data shows the U.S. labor market losing momentum. August brought just 22,000 new jobs, far below expectations, while June’s figures were revised downward into negative territory. The unemployment rate has ticked up to 4.3%, the highest since 2017 outside of the pandemic.
Powell described the job market as “unusual,” pointing to Trump’s immigration crackdown as one reason for a shrinking labor supply.
Lower rates could ease borrowing costs for businesses and consumers, potentially stimulating hiring and spending. But inflation, which has climbed from 2.3% in April to 2.9% in August, remains above the Fed’s 2% target. Much of the increase has been tied to Trump’s new tariffs.
Divided economic outlook
Markets had already priced in at least three-quarters of a point in rate cuts by year’s end, with investors betting the Fed will continue to ease.
Still, some economists argue the move risks reigniting inflation. “Price pressures are likely to pick up in coming months as businesses are forced to pass on higher tariff costs,” Joseph Gagnon of the Peterson Institute for International Economics said.
Others note that while stock markets remain near record highs, middle- and lower-income households are struggling. McDonald’s CEO Chris Kempczinski recently described the U.S. as a “two-tier economy,” with wealthier consumers spending freely and others cutting back.
Trump’s pressure campaign
Since returning to office, Trump has berated Powell and the Fed, calling its members “ashamed” of their record and insisting on rapid rate cuts to spur growth. The administration has also sought to expand its influence on the central bank by installing loyalists like Miran and challenging the tenure of Cook.
Powell has consistently defended the Fed’s independence. “We’ve seen much more challenging economic times,” he said Wednesday. “But from a policy standpoint … there are no risk-free paths.”
The Fed will meet again in October and December to reassess its next moves.
