The Federal Reserve cut interest rates by a quarter percentage point on Wednesday, marking its first reduction this year.
The decision brings the federal funds rate to a target range of 4% to 4.25%, the lowest level in nearly three years.
During his press conference following the Federal Open Market Committee (FOMC) meeting, Chairman Jerome Powell outlined several key reasons for the decision:
Labor Market Softening: Powell explained that while the unemployment rate remains relatively low at 4.3%, there are clear signs of deterioration. “Job gains have slowed significantly to a pace of just 29,000 per month over the past three months,” he noted. This represents a dramatic decline from earlier estimates and suggests the labor market is cooling more rapidly than previously understood.
Shift in Risk Balance: The Fed chair emphasized that the balance of risks has fundamentally changed. “The risks which were clearly tilted toward inflation, I would say they’re moving toward greater equality,” Powell stated. He explained that downside risks to employment have increased, warranting a shift toward a more neutral policy stance.
GDP Growth Moderation: Economic growth has slowed to approximately 1.5% in the first half of 2025, down from 2.5% in the previous year, largely due to reduced consumer spending.
Immigration Impact: A significant factor in labor market changes has been reduced immigration, which Powell said has contributed to both lower labor force growth and reduced demand for workers.
Tariff Effects: While tariffs have begun pushing up goods prices, contributing to inflation, Powell noted that their pass-through to consumers has been “slower and smaller than we thought.”
Despite the rate cut, Powell acknowledged that inflation remains “somewhat elevated” at 2.7% for total PCE prices and 2.9% for core PCE prices over the 12 months ending in August. The Fed projects total PCE inflation will reach 3.0% this year before gradually declining to 2.1% by 2027.
Powell characterized the current economic situation as “challenging” because both of the Fed’s mandates are under stress simultaneously. “It’s a challenging situation when our goals are in tension like this,” he said, referring to the Fed’s dual mandate of maintaining price stability and maximum employment.
The central bank’s updated economic projections suggest two additional quarter-point rate cuts are likely before the end of 2025. However, Powell emphasized that policy decisions will remain data-dependent. “We’re in a meeting-by-meeting situation. We’re going to be looking at the data,” he stated.
