Fed Cuts Rates 25 Basis Points Amid Economic Slowdown

The Federal Reserve, as widely anticipated, announced a 25 basis point reduction in the federal funds rate target range to 4.00%-4.25%. The Federal Open Market Committee (FOMC) voted 11-1 in favor of this decision, indicating a higher level of internal consensus than expected by Wall Street. The sole dissenting vote came from a newly appointed member who advocated for a 50 basis point cut. Two other members, who were previously thought to be potential dissenters, ultimately supported the 25 basis point reduction. These three members were all appointed by the President, who had been exerting pressure throughout the summer for more aggressive rate cuts.

In the post-meeting statement, the FOMC acknowledged that economic activity has "slowed" and that job growth has "decelerated." The committee also noted that inflation has "risen and remains at a relatively high level," indicating a conflict between the Fed's dual mandate of stable prices and maximum employment. The statement emphasized that "the economic outlook remains uncertain" and that the committee is closely monitoring risks on both sides of its mandate, with an increased downside risk to employment. The Chair explained that this rate cut is a "risk management" move aimed at adjusting monetary policy from a previously "moderately restrictive" stance to a more neutral position. The Fed will continue to make decisions on a meeting-by-meeting basis, adjusting policy flexibly based on the latest data.

The dot plot indicates that most officials expect one more rate cut in October and another in December, totaling 50 basis points for the year. Ten participants support two more cuts this year, while nine support only one. A single dot, likely from the dissenting member, suggests an additional 125 basis points of easing, indicating a more dovish stance.

Analysts noted that the dovish tilt within the FOMC is now dominant. Unless inflation or the job market shows significant improvement, the Fed is likely to maintain its current easing path. The market had anticipated more aggressive cuts to prevent a recession, but this move was seen as more of an insurance policy rather than a radical easing. The focus has shifted to the labor market, with the unemployment rate rising to 4.3% in August, the highest since October 2021, and job growth nearly stagnant. The latest revised data from the Bureau of Labor Statistics showed that the actual number of new jobs created in the 12 months ending March 2025 was nearly 100 million fewer than previously reported, exacerbating concerns about job market deterioration.

Pressure from the President to lower rates more aggressively and the appointment of a new member to the FOMC board raised concerns about the Fed's independence. The new member has been openly critical of the Chair and other committee members, seen as a supporter of the President's policies. Another member, who faced legal troubles due to allegations of fraud in mortgage lending, was recently ruled by a court not to be removable by the President. This member voted in favor of the 25 basis point cut.

Analysts viewed the Fed's action as a delicate balance between inflation pressures and employment declines. The cut was seen as cautious rather than hawkish, with the Chair defining it as a "risk management" move rather than the start of a series of rate cuts. The focus has shifted to the slowing labor market, opening the door for further rate cuts this year. The 25 basis point cut signaled that the weak job market and persistent inflation are driving policymakers to act, but the adjustment is gradual rather than a complete shift.

Market reactions were mixed, with the S&P 500 index briefly rising before falling slightly, ending the day down 0.1%. Technology stocks were under pressure. Analysts noted that the market had already priced in this decision, leading to potential short-term "buy the rumor, sell the fact" trading behavior. Investors were advised not to overinterpret the dot plot, as rising inflation could change the future policy path at any time. The Chair acknowledged that the President's tariffs could bring new inflation pressures and reiterated the Fed's data-dependent approach, emphasizing the need to balance controlling inflation and maintaining employment. The primary goal is now to improve employment conditions, with the path to the 2% inflation target lengthening. The Fed is willing to tolerate slightly higher inflation in the short term to achieve labor market stability.