Fed Announces First Rate Cut of 2025, Signals Two to Come

After months of speculation over if, when and by how much the Fed should lower interest rates, the Federal Open Market Committee (FOMC) decided to cut rates for the first time since December 2024. On Wednesday, Fed chairman Jerome Powell announced that the target range for the federal funds rate would be lowered by 25 basis points to a range of 4.00 to 4.25 percent for the time being, ignoring calls, most loudly from President Donald Trump, for a more significant cut. The Fed's projections, which are based on the individual opinions of the 19 committee members, signaled that there could be two more 25-point cuts before the end of the year, although there is an unusually high degree of dissent within the committee on the right policy path ahead.

"There are no risk-free paths now," Powell said at the post-meeting press conference on Wednesday, acknowledging the diversion of opinions among his colleagues. "It is quite a difficult situation for policymakers." Over the past year, the Fed chairman has repeatedly warned that the two goals of the Fed, i.e. price stability and maximum employment, may end up in tension - a scenario that has now become reality. Recent data suggests that the labor market has cooled off significantly, with job additions slowing to a near halt in recent months. And while unemployment remains relatively low for now, Powell said that the latest pace of job creation could be too slow to keep it that way. At the same time, inflation has picked up pace in recent months, as tariffs have driven up the prices of import-heavy goods, putting the Fed in a difficult spot.

Ultimately, the committee members decided that the downside risks to unemployment outweigh the inflation risk for now, but the path ahead remains highly uncertain. "When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate," Powell explained. "With downside risks to employment having increased, the balance of risks has shifted. Accordingly, we judged it appropriate at this meeting to take another step toward a more neutral policy stance."