U.S. Federal Reserve Cuts Rates by 25 bps, Signals Two More Reductions in 2025

The U.S. Federal Reserve lowered its benchmark interest rate by 25 basis points on Wednesday, bringing the federal funds target range to 4.00–4.25%. This marks the Fed’s first rate cut since December 2024 and the first policy move under President Donald Trump’s second term.

The Federal Open Market Committee (FOMC) voted 11–1 in favour of the reduction. Newly appointed Governor Stephen Miran dissented, advocating for a deeper half-point cut. Governors Michelle Bowman and Christopher Waller, who had pressed for easing earlier in July, supported the quarter-point cut this time.

Slowing Job Market and Unemployment Rise

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In its statement, the Fed acknowledged that economic activity slowed in the first half of the year. Job growth has weakened, unemployment has edged higher, though it remains historically low, and inflation continues to hover above desired levels. Policymakers cited “rising downside risks to employment” as a key reason for the policy shift.

The central bank’s updated Summary of Economic Projections now reflects expectations of three cuts in 2025—an increase from the two projected in June. Officials anticipate two more quarter-point cuts later this year, with additional reductions possible in 2026 and 2027. Growth forecasts were slightly revised upward, with the economy expected to expand 1.6% in 2025 and 1.8% in 2026. Median inflation expectations remain unchanged at 3.1% for 2025.

Powell’s Remarks on Labour Market and Fed Independence

Fed Chair Jerome Powell described the decision as a “risk management cut,” pointing to a labour market that has “softened” in recent months. He stressed that job creation is running below the breakeven pace required to stabilise unemployment, adding: “The labour market is softening and we don’t need it to soften anymore—and don’t want it to.”

Powell also underscored the central bank’s independence, rejecting any notion of political influence. “It’s deeply in our culture to do our work based on incoming data and never consider anything else,” he said. He avoided direct comment on President Trump’s reported efforts to remove Governor Lisa Cook or on his own position once his term ends in May 2026.

Market Response and Analyst Views

The market reaction was largely subdued, as the cut had been widely expected. The Dow Jones Industrial Average rose 0.5%, while the S&P 500 was little changed and the Nasdaq slipped 0.2%. Treasury yields moved higher, with the 10-year note at 4.05% and the 2-year at 3.52%. The dollar also strengthened slightly.

Analysts interpreted the Fed’s decision as a sign of concern about labour market conditions rather than alarm about overall growth. Simon Dangoor of Goldman Sachs Asset Management noted that the Fed’s updated outlook signals two further cuts in October and December, suggesting a more dovish tilt.

Peter Cardillo of Spartan Capital Securities described the announcement as “a dovish statement,” citing lower yields and a mild rebound in equities. Kotak Mutual Fund’s Abhishek Bisen described the decision as “marginally dovish,” citing projections for policy easing into 2026 and 2027.

Brian Jacobsen, Chief Economist at Annex Wealth Management, summarised: “Growth is stronger than expected, inflation is tamer than feared, and the labour market is slowing faster than hoped. This is not panic mode—it’s precautionary policy.”

Conclusion

The Fed’s quarter-point rate cut signals a cautious shift in policy amid rising labour market risks. With two more reductions projected this year, officials appear committed to balancing growth and inflation while preventing further strain on employment. Markets largely anticipated the move, but the dovish guidance suggests a longer path of easing into 2026 and 2027.