Fed Cuts Rates as Inflation Soars and Employment Flags

In a significant move, the Federal Reserve announced a 25 basis point cut in the federal funds rate, bringing it down to a target range of 4.00% to 4.25%. This mark is the first decrease since December 2024. The decision comes amidst rising inflation rates and a notable slowdown in employment growth, which have prompted the Fed to take action to stimulate the economy.

Job growth has recently fallen short of expectations, and indicators have shown a deceleration in the U.S. economic activity for the first half of the year. While the inflation rate remains slightly elevated, the employment outlook faces rising risks, driving the Fed to adopt a looser monetary stance to mitigate these challenges.

During the Federal Open Market Committee (FOMC) meeting, newly appointed Fed governor, Stephen Milan, was the sole member dissenting against the decision, advocating for a more aggressive rate cut of 50 basis points. The central bank is projecting further rate reductions, anticipating another 50 basis points cut by the year's end and 25 basis points annually over the next two years.

In addition, the Fed will proceed with its strategy to reduce its holdings of U.S. Treasuries, agency mortgage-backed securities, and agency debt at the current pace. This aligns with its ongoing reduction of the balance sheet.

In response to the announcement, the U.S. dollar index experienced a decline, shedding 0.13% to stand at 96.48. Economic forecasts from the Fed suggest an upward revision of GDP growth rates, now expected at 1.6% for 2025, slightly higher than previous estimates.

Federal Reserve Chairman Jerome Powell, in his remarks following the FOMC meeting, emphasized the Fed's unwavering commitment to maintaining its independence from political pressures despite recent advisories and critiques from the U.S. administration. Looking ahead, Powell hinted at a shift in focus from inflation control to addressing a cooling labor market, suggesting that policy adjustments will be cautious and measured, negating a rapid sequence of rate cuts.

The market had broadly anticipated this monetary adjustment, and the Fed's decision aligns with the wider expectations, indicating a period of watchful monitoring of tariffs, inflation dynamics, and labor market trends before considering further easing measures.