Federal Reserve Cuts Rates as Labour Market Slows
At its 17 September meeting, the Federal Reserve approved the first interest rate cut of the year, lowering the target range for the federal funds rate by 25 basis points to 4.00–4.25%. The decision was supported by 11 voting members of the Federal Open Market Committee (FOMC), with newly appointed Governor Stephen Miran dissenting in favour of a larger 50-basis-point cut.
This decision marks a significant shift in the Fed’s monetary policy stance, reflecting a reassessment of the balance of risks facing the US economy.
In his opening statement, Chair Jerome Powell noted that although the unemployment rate remains low by historical standards, it has been rising in recent months and net job creation has slowed considerably. The loss of momentum in the labour market, combined with a slowdown in private consumption and a less dynamic employment environment, led the Committee to act pre-emptively in support of its dual mandate of maximum employment and price stability.
The latest economic data indicate that economic activity has moderated, with GDP expanding at an annualised pace of around 1.5% in the first half of the year, down from 2.5% in 2024. This slowdown was driven mainly by weaker consumer spending, although business investment has shown some resilience. The housing sector remains fragile, and the labour market has lost momentum: the unemployment rate reached 4.3% in August, while net job creation slowed to a monthly average of just 29,000 jobs over the past three months. Powell noted that this simultaneous slowdown in both labour supply and demand is unusual and increases downside risks to employment, a key factor behind the Committee’s decision to cut rates.
At the press conference, Powell described the labour market as being in a “curious balance”. He explained that the simultaneous decline in labour supply and demand does not stem from cyclical factors or trade policy, but rather from structural changes, particularly those related to immigration. Since the tightening of migration restrictions under the Trump administration, both labour availability and hiring demand have slowed. Powell noted that while the term “balance” may suggest stability, in this case it reflects fragility, as demand has been falling more sharply, contributing to the rise in the unemployment rate.
Regarding inflation, although it is well below the peak reached in mid-2022, it remains above the Fed’s 2% target. Headline PCE inflation rose 2.7% year on year in August, while core PCE stood at 2.9%. The recent uptick in inflation was driven mainly by higher goods prices, partly fuelled by new tariffs, while services inflation continues to moderate. Short-term inflation expectations have edged up slightly, but longer-term expectations remain anchored around the Fed’s target. Powell acknowledged that tariffs have contributed to recent inflationary pressures but argued that their impact should be transitory, although greater persistence cannot be ruled out.
The Fed’s updated economic projections (Summary of Economic Projections – SEP) show only marginal changes compared with the June release, pointing to a broadly stable outlook. Inflation expectations, for both headline and core PCE, remain largely unchanged for 2025, with only a slight upward revision for 2026. Growth projections were revised slightly higher, reflecting a somewhat more optimistic view of the economy’s resilience. By contrast, the projected unemployment rate remains virtually unchanged, indicating that the Committee continues to expect only a moderate deterioration in labour market conditions, despite emerging risks.
The FOMC dot plot shows a more dovish stance compared with the June meeting. The median projection for the federal funds rate at the end of 2025 is now 3.6%, down from 3.9% previously, implying two additional 25-basis-point cuts by year-end.
The median path then stabilises, with rates expected to fall to 3.4% in 2026 and 3.1% in 2027, before converging towards a long-run neutral rate of 3.0%.
The dispersion of individual projections remains wide, reflecting ongoing uncertainty surrounding the future path of inflation and the labour market. Powell stressed that these projections do not represent a pre-set plan, but rather each member’s assessment of the most likely economic outlook in an environment of heightened uncertainty.
During the press conference, Powell described the rate cut as a “risk management” measure, emphasising the need for the Committee to balance upside risks to inflation against the growing risks of deterioration in the labour market. He reiterated that monetary policy is not on a pre-set path and that future decisions will depend on incoming data and the evolving economic environment. The Committee remains committed to bringing inflation sustainably back to its 2% target, while supporting maximum employment.
Powell also addressed the divergence of views among Committee members, noting that the wide range of projections reflects not only differing economic assumptions but also different perspectives on how to balance the Fed’s dual mandate. “It would be surprising not to have a significant range of views in such an unusual situation,” he said. Some members place greater emphasis on inflation risks, while others are more concerned about the deterioration in labour market conditions. Powell acknowledged that the Fed is operating in a challenging environment, with no risk-free solutions, and underscored the importance of flexibility in the conduct of monetary policy.
Market expectations remained stable following Powell’s remarks. Investors continue to anticipate two additional 25-basis-point cuts by year-end, assigning a high probability to the first in October and an increasing probability to a second in December. This outlook reflects confidence in a gradual, data-dependent easing cycle, consistent with the Fed’s latest guidance.
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