US Fed cuts rates by 25 bps to 4-4.25% as expected, signals two more cuts this year as job risks rise

The US Federal Reserve on Wednesday cut its benchmark interest rate by 25 basis points to a range of 4.00-4.25 percent, as was widely expected. This was the US Fed's first reduction since December 2024 and the first of President Donald Trump’s second term.

The Federal Open Market Committee voted 11–1 in favour of the rate cut, with newly appointed Governor Stephen Miran dissenting in support of a deeper half-point cut. Governors Michelle Bowman and Christopher Waller, who had pushed for easing in July, backed the quarter-point reduction this time.

Job gains slow, unemployment edges up

In its statement, the US Fed said “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. Inflation has moved up and remains somewhat elevated.” It added that “downside risks to employment have risen,” prompting the shift in policy.

The Summary of Economic Projections showed policymakers now expect three rate cuts in 2025 -- up from two pencilled in June -- with two more quarter-point reductions this year, and additional moves in 2026 and 2027. Median estimates put underlying inflation at 3.1 percent at the end of 2025, unchanged from June, while growth forecasts were lifted to 1.6 percent in 2025 and 1.8 percent in 2026.

Powell highlights labour market concerns, independence

At his press conference, US Fed Chair Jerome Powell called the quarter-point move a “risk management cut,” stressing that the labour market has softened and “the recent pace of job creation appears to be running below the breakeven rate needed to hold the unemployment rate constant.” He added: “The labour market is softening and we don’t need it to soften anymore (and) don’t want it to.”

Powell reiterated the Fed’s independence in the face of pressure from the Trump administration, saying: “It’s deeply in our culture to do our work based on the incoming data and never consider anything else... We don’t frame these questions at all or see them in terms of political outcomes.” He declined to comment directly on Trump’s push to fire Governor Lisa Cook or on his own future after his term ends in May 2026, saying only that there was “nothing new” to share.

On policy, Powell said inflation risks had “probably become a little less” since April as growth slowed, but he cautioned that goods prices are still feeding through. “The increase in goods prices accounts for most of the increase in inflation... and we expect them to continue to build over the rest of this year and into 2026,” he said. Tariffs, he added, were pushing up prices but looked increasingly like “a one-time price increase” rather than a sustained inflationary process. He also noted that consumers have so far felt only a small impact, as companies absorbed much of the cost.

Markets see muted response

Wall Street’s reaction was muted, with investors viewing the decision as largely priced in. The Dow Jones Industrial Average rose 0.5 percent, or about 260 points, after fluctuating through the session. The S&P 500 was little changed and the Nasdaq slipped 0.2 percent. Bond yields moved higher, with the 10-year at 4.05 percent and the 2-year at 3.52 percent. The dollar edged up.

Analysts said the US Fed’s stance reflected rising concern over the labour market rather than panic over growth. “The skew of the dot plot indicates that the Fed is likely to deliver 25bp cuts in October and December on top of today’s reduction,” Reuters cited Simon Dangoor of Goldman Sachs Asset Management as saying. “A majority of the FOMC is now targeting two further cuts this year, indicating that the doves on the committee are now in the driver’s seat.”

Peter Cardillo of Spartan Capital Securities called the outcome “pretty much a dovish statement,” noting that “yields are moving a bit lower now and stocks are turning around to the upside,” according to Reuters.

Kotak Mutual Fund’s Abhishek Bisen said the decision was “marginally dovish versus expectation,” pointing to the Fed’s projections for further easing into 2026 and 2027.

Brian Jacobsen, Chief Economist, Annex Wealth Management, summarised: “Broad economic growth is stronger than expected, inflation is a bit tamer than feared, and the labour market is decelerating faster than hoped. All in, it’s not a sign that they’re in panic mode, nor should they be. Miran’s dots stand out like a sore thumb, so those are going to be perceived more as signalling than any sort of indicator of where policy might actually head.”