Fed's Balancing Act: Lowering Rates to Support Employment Amid Ongoing Inflation

On September 17, the Federal Reserve’s Federal Open Market Committee (FOMC) implemented its initial interest rate decrease of 2025, lowering the federal funds rate to a target range of 4.0%–4.25%. This is the first rate cut since late 2024, ending a nine-month period without changes. The move comes amid mounting worries about a softening job market and persistent inflation, with policymakers indicating that two more rate cuts could follow this year. The adjustment is intended to make borrowing less expensive for both consumers and businesses, while also managing the Fed’s dual objectives of stable prices and full employment.

Chair Jerome Powell highlighted that, although inflation continues to exceed the 2% goal, recent figures point to a slowing pace. The Fed’s release stated that “inflation has moved up and remains somewhat elevated,” but Powell suggested that the likelihood of ongoing high inflation has lessened as the labor market and economic growth have cooled. The unemployment rate climbed to 4.3% in August, the highest since October 2021, and job creation has decelerated. Powell partly attributed the labor market’s downturn to changes in immigration and structural factors, while also noting that tariffs could be contributing to reduced demand for workers.

Alongside the rate cut, the Fed also lowered the primary credit rate to 4.25%, which is used for lending to banks. The decision was not unanimous, as newly appointed Governor Stephen Miran—selected by President Donald Trump—opposed the move, favoring a steeper 50-basis-point reduction. Miran’s appointment has sparked debate about the central bank’s autonomy, but Powell reiterated the Fed’s dedication to making decisions based on economic data and maintaining independence from political pressures.

The Fed’s outlook suggests that inflation will stay above its target for an extended period, with officials projecting elevated inflation through 2028. Powell remarked that while tariffs might temporarily push up the prices of goods, their impact on inflation should be brief. The central bank is focused on ensuring that these one-off price increases do not become embedded in the wider economy.

The impact of the rate cut on markets and households is mixed. While lower rates may encourage more borrowing and boost economic activity, Powell warned that substantial drops in mortgage rates would require more significant rate cuts. He also pointed out that issues like the nationwide housing shortage are structural and outside the Fed’s direct influence. As of September 11, the average 30-year fixed mortgage rate was 6.35%, and experts believe that further rate reductions by the Fed could have a modest effect on this figure.

Financial markets responded calmly to the announcement, as investors had largely anticipated the 25-basis-point cut. The S&P 500 and Nasdaq closed lower, whereas the Dow saw a slight increase. The Fed’s latest policy move highlights its ongoing challenge of fostering economic growth while keeping inflation in check, a task made more complex by global tensions and changes in domestic policy.