Fed's Jobs-Focused Rate Cut Sparks Debate as Inflation Persists

The Federal Reserve cut the federal funds rate by 0.25 percentage points on September 17, 2025, reducing the target range to 4.00%-4.25%. This marks the first easing since 2022 and signals a shift in the central bank's focus toward addressing labor market risks amid persistent inflation. The move, supported by 11 of 12 Federal Open Market Committee (FOMC) members, was driven by concerns over slowing job growth and rising unemployment risks, though dissenting Governor Stephen Miran advocated for a larger 0.50-point reduction .

The FOMC's updated "dot plot" projects two additional 25-basis-point cuts in 2025, with rates expected to reach 3.50%-3.75% by year-end. Further reductions are anticipated in 2026 and 2027, with the median projection pointing to a terminal rate of 3.00%-3.25% by the end of 2027. These projections reflect a cautious approach, balancing the need to support growth against the risk of reigniting inflation, which remains above the Fed's 2% target at 3.1% in 2025. The central bank emphasized that downside risks to employment have risen, with unemployment projected to climb to 4.4% by late 2026, up from 4.3% in August .

Political dynamics have intensified the debate over the Fed's policy path. President Donald Trump, who appointed Miran to the Board of Governors, has pushed for aggressive rate cuts to stimulate the housing market and reduce government borrowing costs. Miran's advocacy for deeper cuts-potentially totaling 1.25 points by year-end-aligns with Trump's stated goals but contrasts with the broader FOMC's more measured stance. Fed Chair Jerome Powell underscored the central bank's independence, noting that political pressures cannot override its mandate to balance price stability and employment .

Economic projections highlight diverging views on inflation and growth. The FOMC expects core inflation to ease to 2.6% by 2026, but analysts caution that tariff-driven price pressures could keep inflation higher than projected. GDP growth is forecast at 1.6% in 2025, with further moderation to 1.3% in 2026, reflecting weaker labor market dynamics and subdued business investment. Powell acknowledged the precarious balance in the labor market, where both supply and demand for workers have declined, raising risks of a self-reinforcing cycle of layoffs and reduced spending .

The market reaction to the rate cut was mixed, with equities rallying on the news while Treasury yields drifted lower. The S&P 500 rose to record highs, reflecting optimism about eased financial conditions, but the U.S. dollar weakened against major currencies, benefiting commodities and emerging markets. Analysts at Goldman Sachs noted that a majority of FOMC members now favor two further cuts in 2025, signaling a dovish tilt in policy. However, dissenters like Kansas City Fed President Jeff Schmid argue that inflation remains too high, warning that aggressive rate cuts could exacerbate price pressures .

The Fed's decision underscores a broader shift in monetary policy priorities. While inflation remains a concern, the central bank has prioritized mitigating labor market risks, a reversal from its earlier focus on tightening. This approach aligns with historical patterns, where rate cuts have typically preceded periods of economic stabilization. However, the path forward remains uncertain, with risks of stagflation or a prolonged slowdown complicating the Fed's balancing act. Powell emphasized that future decisions will remain data-dependent, with the next meeting scheduled for October 28-29 .

Source: [1] Morningstar (https://www.morningstar.com/economy/fed-cuts-rates-signals-more-come-2025) [2] CNBC (https://www.cnbc.com/2025/09/17/fed-rate-decision-september-2025.html) [3] US News (https://money.usnews.com/money/personal-finance/articles/fed-cuts-interest-rates-by-a-quarter-point-tees-up-two-more-cuts-in-2025)