The Federal Reserve lowered its benchmark interest rate by 0.25 percentage points on Wednesday, marking its first cut of the year as policymakers weigh slowing job gains, elevated inflation, and rising risks to the labor market.
The Federal Open Market Committee (FOMC) reduced the target range for the federal funds rate to 4.00% to 4.25%, citing a shift in the balance of risks to its dual mandate of maximum employment and stable prices.
“Recent indicators suggest that growth of economic activity moderated in the first half of the year. Job gains have slowed, and the unemployment rate has edged up but remains low,” the Fed said in its statement.
The decision was supported by all but one voting member. Newly appointed Trump pick Stephen Miran dissented, favoring a larger half-point cut.
Chair Jerome Powell and 10 other officials voted for the quarter-point move.
Updated projections released alongside the decision indicate that most Fed policymakers expect at least two additional rate cuts this year, which would bring the benchmark rate down to a range of 3.50% to 3.75% by year-end.
Out of 19 participants, 10 forecast two more cuts, while nine anticipate only one further reduction.
The Fed’s so-called “dot plot” also suggests a slower pace of cuts in 2026 and 2027, converging toward a long-term neutral rate near 3%.
While the Fed acknowledged inflation remains “somewhat elevated,” it emphasized growing concern over downside risks to employment.
Officials raised their near-term growth outlook but left forecasts for inflation and unemployment broadly unchanged.
The central bank also said it will continue to reduce its holdings of Treasury securities and agency debt, though at a moderated pace.
“The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective,” the statement said, adding that future rate decisions will depend on incoming data and evolving risks to the economy.
'Balanced response'
Wells Fargo analysts see the outcome of the Fed’s meeting as a “balanced response” to the labor market's loss of momentum and still elevated pace of inflation.
“We think the FOMC will put more weight on employment and cut the federal funds rate by 25 bps at each of its next two meetings, pushing the target range down to 3.50% to 3.75% by year-end,” the analysts wrote.
“We project two more 25 bps rate cuts at the March and June meetings next year followed by a long hold, resulting in a terminal fed funds rate of 3.00% to 3.25%.”
Kathleen Brooks, research director at XTB, noted that the Fed failed to deliver a dovish surprise.
“The Fed has cut interest rates by 25bps as expected and also reduced its forecast for interest rates in 2025,” Brooks noted.
“The Dot Plot shows that the median estimate for rates this year has been revised down to 3.625% from 3.875%in June. The forecasts for further out the curve have been left unchanged, and the terminal rate was also unchanged at 3%, signaling a 5 more rate cuts in this cycle.”
Miran being the only dissenter was unexpected, with Chrstopher Waller also thought to vote for a larger rate cut.
“Although the lone dissenting voice calling for a 50bp cut could be seen as relatively hawkish, the market is taking the Fed decision in its stride,” Brooks said.
“The dollar is mostly unchanged, stocks are mildly lower and yields haver been choppy and are now mildly higher on the day.”
Brooks attributed the mild market reaction to the Fed’s update to a few factors.
“Firstly, the Fed has essentially ratified the market view that there is a strong likelihood of two further rate cuts this year, secondly, the latest Dot Plot suggests that the Fed will embark on the next stage of its rate cutting cycle, and thirdly, traders may end up dismissing this meeting altogether since their will be a large turnover of FOMC members in the coming months,” Brooks said.
“US stocks have whipsawed around in the aftermath of the meeting, up one minute and down the next. However, we do not see this decision as being an impediment to future stock market gains, even if it triggers short-term stock market volatility.”
- Updated with analyst comments -