The Federal Reserve lowered interest rates for the first time this year, reducing its benchmark rate by a quarter of a percentage point to a range of 4.00% to 4.25%. The move marks the Fed’s first policy easing since December and sets the stage for additional cuts as officials adjust to a cooling labor market and persistent inflation.
The decision, made in a split vote, reflects growing concern about slowing job growth and rising unemployment. In August, the economy added just 22,000 jobs, while the unemployment rate climbed to 4.3%. Recent revisions also showed weaker job growth in earlier months, reinforcing the case for easing monetary policy. The Fed’s quarterly “dot plot” projections now point to two more rate cuts before the end of 2025, up from earlier expectations.
The outlook among policymakers remains divided, however. The updated dot plot showed nine officials anticipating three cuts this year, six projecting just one, and a small minority envisioning either no cuts or significantly more. For 2026, the consensus is for one additional reduction.
Economic projections released alongside the decision highlight both resilience and challenges. Inflation is expected to rise 3.1% this year, unchanged from prior estimates, while GDP growth was upgraded slightly to 1.6% from 1.4%. The unemployment rate is forecast to reach 4.5% by year-end, reflecting mounting labor market softness.
The Fed’s move comes amid heightened political scrutiny. President Donald Trump has been pressing for lower interest rates, repeatedly criticizing the central bank for acting too slowly. His influence on the institution has grown, with newly confirmed governor Stephen Miran—previously a White House economic adviser—joining the board in time for this meeting. Miran favored a larger half-point cut, underscoring divisions within the Fed about how aggressively to ease policy.
At the same time, Trump has sought to reshape the central bank’s leadership. His administration attempted to remove Governor Lisa Cook, but courts have so far blocked the effort. Cook participated in this week’s meeting following rulings that found insufficient grounds for her dismissal. The legal battle over her position is expected to continue, potentially reaching the Supreme Court.
The Fed now faces the delicate task of balancing weaker labor data with inflation that remains well above its 2% target. Core consumer prices, which exclude food and energy, rose 3.1% in August, matching July’s reading and showing little progress in bringing inflation lower. This persistence complicates the Fed’s ability to cut rates quickly without risking renewed price pressures.
For financial markets, the latest move confirms expectations of a shift toward looser monetary policy. Investors had already priced in a September cut, but the signal of further easing provided an additional boost to assets that benefit from lower rates, including equities and gold. The dollar weakened following the announcement, reflecting anticipation of easier financial conditions.
As the year progresses, the central bank’s policy path will remain a focal point for markets, businesses, and households. With economic data softening and political pressures intensifying, the Fed’s challenge will be to support growth without reigniting inflation risks.