Federal Reserve cuts interest rates for first time this year

by Dr. Kirkpatrick Williams  

The Federal Reserve cut interest rates by a quarter percentage point on Wednesday — its first reduction of 2025 — and projected two more cuts for the rest of this year.

The central bank voted in a split decision to cut its benchmark interest rate to a range of 4.00% to 4.25%. The 25 basis point cut marked the first time the Fed has eased rates since last December.

Newly confirmed Fed governor Stephen Miran disagreed with the decision, preferring to cut rates by a half a percentage point. Miran, a White House adviser to President Trump, was installed on the central bank board earlier this week.

"I think we were right to wait" until now to make the first cut of 2025, Fed Chair Jerome Powell said at his press conference Wednesday, reiterating that time was needed to assess the impacts of tariffs on the economy.

It was a slight rebuke to criticisms from the White House that he was "too late" to consider a cut for much of this year.

Powell also downplayed the notion that many inside the central bank were in favor of a bigger cut, saying, "There wasn't widespread support at all for a 50 basis point cut today." He sidestepped any direct comment on whether Miran's appointment threatens the Fed's independence from the executive branch.

"We are strongly committed to maintaining our independence," Powell added.

The median estimate from all Fed officials is that there will be two more rate cuts this year, up from a prior estimate released in June, as the labor market softens.

"Job gains have slowed," Fed officials said in a statement released Wednesday, "and the unemployment rate has edged up" but remains "low." They dropped a prior characterization of the labor market as "solid."

The predictions about what monetary policy could look like for the rest of 2025 came in the form of the Fed's "dot plot," a chart updated quarterly that shows each official's prediction about the direction of the central bank's benchmark interest rate.

The last dot plot, released in June, revealed a divide among Fed officials about the path forward amid uncertainties about how the Trump administration's policies on tariffs, immigration, and taxes would impact the economy. At that time, seven officials saw no rate cuts this year, while eight saw two cuts.

That division was still evident in the latest dot plot. Nine officials now see three cuts, while six officials see one cut. One saw no cuts, and one saw six cuts. For next year, the median is for one more rate cut.

Powell said it is "not surprising to me you have a range of views," given the amount of tension between the Fed's dual goals of maintaining stable prices and maximizing employment.

"There is no risk-free path," he added. "It is quite a difficult situation for policymakers."

Fed policymakers also used their dot plot to update their predictions for the economy's direction.

Inflation is now seen rising 3.1%, the same as the previous estimate. GDP was upgraded to 1.6% versus a 1.4% prediction made in June. The unemployment rate is seen ticking up to 4.5%, compared with the same estimate in June. The unemployment rate currently stands at 4.3%.

The labor market was already starting to slow in the lead-up to this week's Fed meeting, which contributed to the support for a cut on Wednesday. The economy added just 22,000 jobs in August, with the unemployment rate rising to 4.3% from 4.2%.

Job growth for June was also recently revised into negative territory to -13,000 jobs. July showed below-trend growth compared with the past year. All of that amounted to three months of slowing job growth.

The Fed's challenge is that inflation remains sticky, hovering well above the central bank's 2% target. The latest reading of the Consumer Price Index showed that "core" prices, excluding volatile food and energy prices, rose 3.1% for the month of August, holding the same level as July.

The decision to ease monetary policy Wednesday follows months of pressure from Trump to bring rates down as the president and his White House allies repeatedly accused Powell of being "too late."

The president has, at the same time, been trying to put his own stamp on the central bank, installing Miran as a Fed governor just in time to participate in this week's meeting. He has also tried to fire existing Fed governor Lisa Cook while considering candidates to replace Powell when he steps down as chair next May.

Cook did participate in this week's meeting after a federal judge last week ruled she could remain on the Fed's board while disputing the president's firing.

An appeals court on Monday also rejected Trump's attempt to oust Cook from her role. After being rebuffed by appeals, the Trump administration is expected to turn to the Supreme Court to approve Cook's ouster.

Powell, when asked about the Cook situation on Wednesday, said it would not be appropriate for him to comment on the court case.

"We are just going to keep doing our jobs," he added, when asked about political pressure on the institution.