The Federal Reserve cut US interest rates by 25 basis points on Wednesday, resuming its policy reduction cycle, due to increased concerns over the strength of the labour market.
And new forecasts released by the Fed showed the central bank projects to cut rates by another 50 basis points this year, which would lower the federal funds rate to about 3.6 per cent in December.
"While the unemployment rate remains low it has edged up, job gains have slowed and downside risks to employment have risen," Fed Chair Jerome Powell told reporters.
The decision, which lowers the Fed's benchmark rate to the range of 4 per cent to 4.25 per cent, is the first since President Donald Trump returned to the White House this year. Mr Trump has repeatedly demanded that the Fed aggressively cut rates.
The UAE Central Bank, which follows Fed decisions because of the currency peg, also reduced rates by 25 basis points after the announcement.
The Fed's decision had a muted reaction on Wall Street, which had already priced in a quarter-point cut before Wednesday's meeting. The Dow Jones Industrial Average rose 0.57 per cent on market close, while the S&P 500 and Nasdaq Composite dipped 0.10 and 0.33 per cent, respectively.
A 'risk management cut'
Mr Powell said the most recent cut was "risk management" and any more decisions will be made meeting by meeting. The central bank is trying to balance both sides of its dual mandate – price stability and maximum employment.
In his news conference after the meeting, Mr Powell "struck a mildly hawkish tone, in our view, and continued to signal that the Committee remains in no rush to return to neutral", Wells Fargo economists Sarah House and Michael Pugliese wrote to clients.
The neutral rate is that at which policy neither restrict nor loosens economic activity.
The Fed placed greater weight on its employment mandate for now, after two jobs reports were weaker than expected, and a preliminary report that showed the US economy added 911,000 fewer jobs than previously estimated in the year ending in March.
"In this less dynamic and somewhat softer labour market, the downside risk has risen," Mr Powell said.
The Fed anticipates the unemployment rate to edge up from its current 4.3 per cent to 4.5 per cent by the end of the year, unchanged from its June projection.
Mr Powell said the labour market is in a "curious balance" where the supply and demand in the labour market are shrinking due to lower immigration and a lower labour force participation.
Concerns over the labour market come as inflation remains above the Fed's 2 per cent target, with policymakers now in the unenviable position of choosing which side of its mandate is given priority.
The Fed has been cautious about cutting rates this year, pointing to the potential inflationary effects that Mr Trump's tariff agenda could have on the US economy. Most economists say tariffs will lead to higher costs, but Mr Powell said he anticipates this will lead to a one-time price increase rather than a persistent effect.
"I think we were right to wait and see how tariffs and inflation and the labour market evolved," he said.
The Fed began its most recent loosening cycle last year, cutting rates by a total of 100 basis points beginning in September 2024 as inflation moderated closer to the Fed's 2 per cent goal.
The consumer price index rose 0.4 per cent on a monthly basis in August, its largest increase since January, with annual headline inflation rising 2.9 per cent.
The Fed's updated forecast projects the inflation rate to be 3 per cent on an annual basis this year, unchanged since June, before moderating to 2.6 per cent in 2026, slightly higher than its June projection.
The Fed estimates the core inflation rate to settle at 3.1 per cent by the end of 2025 before falling to 2.6 per cent in 2026, also higher than its June forecast.
The nation's economy is projected to grow at 1.6 per cent this year before expanding at a still-tepid 1.8 per cent growth in 2026, slightly higher than the Fed's June forecast.
"We believe the Fed's near-term economic projections remain overly pessimistic, leading us to anticipate a slower pace of easing in upcoming meetings," Michael Pearce, deputy chief US economist at Oxford Economics, wrote to clients.
Powell hush on court challenge
This week's meeting also came at a moment of intense political drama, with Mr Trump taking extraordinary steps to reshape the Fed to his liking – so far, with mixed results.
Stephen Miran, a senior economic ally to Mr Trump and the head of the Council on Economic Advisers, was confirmed to serve on the Fed board in a temporary capacity on Monday.
Mr Miran was the lone dissenter during the September meeting, preferring to lower rates by 50 basis points.
Also sitting at the table this week was Fed governor Lisa Cook, who remains in litigation with the President as he tries to remove her from the job over allegations of mortgage fraud. No charges have been brought against her.
A divided opinion in an appeals court permitted Ms Cook to remain on the Fed board while her legal battle with Mr Trump proceeds. The case is likely to be heard before the Supreme Court.
A Fed official can only be fired “for cause”, which is generally thought to mean malfeasance or neglect of duty. No Fed official has ever been fired, and Ms Cook maintains Mr Trump does not have the authority to dismiss her.
Mr Powell said the Fed remains united in pursuing its dual mandate goals. "Beyond that, I don't have anything to share," he said, when asked about Ms Cook's court battle.
Mr Trump has spent much of his second term attacking Mr Powell and the Fed over their hesitancy to cut rates, demanding they reduce borrowing costs by as much as 3 per cent.
In addition to installing a loyalist on the board and trying to push Ms Cook out, Mr Trump has considered sacking Mr Powell, although he has since retreated from the idea.
Mr Trump suggested on Monday that he would not be satisfied with a quarter-point cut.
“'Too late, must cut interest rates, now, and bigger than he had in mind,” Mr Trump posted on social media, referring to Mr Powell.
