Federal Reserve Cuts Rates 25 Basis Points Amid Economic Uncertainty

The Federal Reserve reduced its benchmark interest rate by 25 basis points on Wednesday, marking the first cut since December 2018. This move comes amidst growing pressure from the U.S. President to lower rates to stimulate the economy. The decision was made following a two-day meeting of the Federal Open Market Committee (FOMC), which adjusted the federal funds rate to a range of 4% to 4.25%.

The Federal Reserve's statement highlighted that while the unemployment rate has "slightly increased," it remains low, and inflation has "risen" and is still at a relatively high level. The statement also noted that "economic uncertainty remains high." The committee expressed concern over the risks to its dual mandate, which includes achieving maximum employment and a 2% inflation rate, indicating that the downside risks to employment have increased.

During the post-decision press conference, the Federal Reserve Chair described the current economic landscape as "challenging." He noted that in the short term, inflation risks are tilted to the upside, while employment risks are tilted to the downside. The Chair emphasized the need to balance the Federal Reserve's dual mandate when its goals are in such tension.

According to the latest economic projections from FOMC members, the federal funds rate is expected to be 3.6% by the end of this year, down from the 3.9% projected in June. This suggests two more rate cuts, likely to occur during the remaining two FOMC meetings in October and December. Additionally, the rate is projected to fall to 3.4% by the end of next year, 0.2 percentage points lower than previously forecasted.

The Federal Reserve also revised its GDP growth forecast for this year to 1.6%, up from the 1.4% estimated in June. Personal consumption expenditures (PCE) inflation is expected to reach 3% by the end of the year, consistent with the June projection. PCE inflation is a key measure of household spending on goods and services.

During the press conference, the Chair commented on the impact of the U.S. President's tariff policies, noting that the rise in goods prices is a significant factor in the increase in inflation. He stated that these effects are not yet substantial but are expected to continue to grow for the remainder of this year and into next year.

The meeting also revealed internal disagreements within the Federal Reserve, as the newly appointed member voted against the 25 basis point cut, preferring a 50 basis point reduction. This vote has raised questions about the Federal Reserve's independence, particularly given the member's recent appointment. In response to these concerns, the Chair reaffirmed the Federal Reserve's commitment to maintaining its independence, asserting that its decisions are based solely on incoming data and not influenced by political considerations. The Chair emphasized that this data-driven approach is deeply ingrained in the Federal Reserve's culture and operations.