The U.S. Federal Reserve lowered its benchmark interest rate by a quarter percentage point on Wednesday, September 17, marking the first reduction since December, and signaled that two additional cuts are likely before the year ends. The decision comes as mounting worries over the health of the labor market take precedence over inflation concerns, underscoring the delicate balance the central bank must maintain in a shifting economic landscape.
The move reduces the federal funds rate to roughly 4.1%, down from 4.3%. Chair Jerome Powell emphasized that the decision was driven by signs of weakening employment, with hiring slowing sharply in recent months and unemployment edging higher. “It’s really the risks that we’re seeing to the labor market that were the focus of today’s decision,” Powell said during a press briefing following the Fed’s two-day policy meeting.
While the cut was widely anticipated, Powell refrained from laying the foundation for a rapid series of rate reductions. Instead, he and other policymakers indicated that two more cuts this year were probable, followed by just one in 2026. This projection fell short of Wall Street’s expectations, as many investors had been pricing in as many as five cuts over the next 18 months. Powell further stressed that the projections should be regarded as a “probability” rather than a “certainty,” noting divisions within the committee on how aggressively to ease policy.
Diverging Views Inside the Fed
The rate-setting Federal Open Market Committee (FOMC) revealed sharp differences among its 19 members. Seven officials opposed additional cuts altogether, two supported just one more, and 10 backed at least two more reductions. One policymaker—widely assumed to be newly appointed Stephen Miran—favored multiple larger cuts that would lower rates to around 2.9% by year’s end. Miran, confirmed by the Senate just hours before the meeting began, cast the lone dissenting vote, arguing for a deeper half-point reduction. Powell acknowledged that “there wasn’t very much support” for that approach.
Despite the divisions, Powell managed to secure a broad consensus, even as the Fed grapples with unprecedented political pressure. President Donald Trump, who has repeatedly criticized Powell for moving too slowly, has been pushing for drastic cuts of up to three full percentage points. He has also attempted to remove Fed Governor Lisa Cook, marking the first time in the institution’s 112-year history that a sitting president has sought to oust a central bank official. Courts have so far blocked the attempt, ruling that Trump failed to provide adequate justification.
A Challenging Economic Landscape
The Fed is navigating an unusual set of circumstances. Inflation, though off its peak, remains elevated at 2.9% in August compared with a year earlier, up from 2.7% in July. This keeps it above the central bank’s long-standing 2% target. Ordinarily, rising inflation would deter rate cuts, but the rapid slowdown in job creation has forced officials to recalibrate priorities. Powell acknowledged the complexity of the moment: “There are no risk-free paths now. It’s not incredibly obvious what to do.”
The current dynamic—weak hiring paired with persistent inflation—is atypical. Normally, slowing growth reduces consumer demand and curbs price increases. Yet tariffs, tighter immigration enforcement, and other policy shifts have added supply-side pressures that complicate the traditional relationship between inflation and employment. Powell has suggested that sluggish demand may eventually weigh on inflation, even if tariffs continue to push up costs in the near term.
Market Reaction and Global Context
Financial markets reacted cautiously to the announcement. The S&P 500 dipped 0.1% at the close, while the Nasdaq also fell slightly. The Dow Jones Industrial Average managed a modest 0.5% gain, reflecting mixed investor sentiment.
Globally, the Fed’s action sets it apart from other major central banks. The European Central Bank left rates unchanged last week, citing cooling inflation and manageable fallout from U.S. tariffs. The Bank of England, which meets Friday, is also expected to hold its benchmark steady as U.K. inflation remains elevated at 3.8%.
What Comes Next
The Fed now faces the difficult task of restoring confidence in its ability to manage both price stability and employment while resisting political interference. Powell sought to reassure the public of the institution’s independence, saying, “I don’t believe we’ll ever get to that place. We’re doing our work exactly as we always have now.”
Whether the central bank can maintain this balancing act remains uncertain. Investors, businesses, and households alike are bracing for what could be a prolonged period of volatility as the Fed navigates one of its most challenging policy environments in decades.
