The Federal Reserve lowered its federal funds rate target range by 25 basis points, to 4.00–4.25 percent, on Wednesday. Before the decision, it had held rates steady since December 2024. The move came as no surprise to market participants, who had widely anticipated a cut in light of the weakening labor market.
At the post-meeting press conference, Fed Chair Jerome Powell stressed challenges on both sides of the Fed’s dual mandate. Unemployment, while still low, has edged higher in recent months, and job growth has slowed with risks of further weakening. At the same time, inflation has picked up again and remains above the Fed’s 2-percent target.
Powell noted that real Gross Domestic Product growth slowed to 1.5 percent in the first half of the year, reflecting weaker consumer spending. Business investment, however, has risen since last year. The median committee member raised its 2025 real GDP growth projection to 1.6 percent, up from 1.4 percent in June.
Powell reported that wage growth is moderating, but still outpacing inflation. Job growth, however, has slowed sharply, reflecting lower labor force participation, reduced immigration, and weakening labor demand. At present, job gains are too modest to hold the unemployment rate steady. Even so, the median committee member left its 2025 unemployment projection unchanged at 4.5 percent.
Powell acknowledged that inflation remains above target and has picked up in recent months. He observed that expectations have drifted higher this year, reflecting concerns about the lingering effects of tariffs. Long-run expectations remain anchored near 2 percent, though. The median committee member continues to project 3.0 percent inflation in 2025.
Echoing past remarks, Powell underscored the uncertainty surrounding tariffs and their effect on inflation. While tariffs have pushed some prices higher, the broader impact remains unclear. He explained that tariff-driven inflation should be short-lived — what I’ve described as a one-time shift in the price level — but cautioned that the effect could prove more persistent if prices adjust slowly.
Powell explained that rising inflation risks and a weakening labor market have put the Fed’s dual mandate in tension. The committee judged that employment risks have intensified since its last meeting, making a rate cut appropriate. He also cast the move as a step toward a neutral stance, acknowledging that policy is still tight.
Judging by their projections, everyone on the committee appears to agree that the current federal funds rate target range remains above the longer-run neutral rate. The median committee member thinks the current target range is at least 100 basis points above neutral. The relevant question, then, is how quickly the FOMC should return monetary policy to a neutral stance.
Some FOMC members prefer a wait-and-see approach, at least in the near term. According to the Fed’s dot-plot, seven committee members indicated the federal funds rate target range should be no lower by the end of the year. But most believe additional easing will be warranted this year. Twelve committee members said the federal funds rate target range should be at least 25 basis points lower, and ten of those thought it should be at least 50 basis points lower. The median member now projects the midpoint of the federal funds rate target range at 3.6 percent following the December meeting, having previously projected it would decline to just 3.9 percent this year.
One committee member, most likely the newly-appointed Governor Stephen Miran, thinks the FOMC should take a much more aggressive approach toward a return to neutral. That participant indicated the federal funds rate should be between 2.75 and 3.0 percent by the end of the year. Miran dissented from this week’s decision, preferring a deeper, 50-basis-point cut.
Taken together, Powell’s comments reflected a clear break from his past remarks about the health of the labor market and broader economy. With unemployment risks now taking center stage, the Fed has opened the door to further rate cuts, even as inflation remains above target. The path ahead will hinge on whether the recent weakness in the labor market deepens — and whether longer term inflation expectations remain anchored near the Fed’s target.
