Fed cuts rates by quarter point and signals more are likely

Wednesday’s decision unfolded against a backdrop of unprecedented political pressure on a central bank that has generally been allowed to operate with independence from direct political control.

President Trump has berated Fed Chair Jerome Powell for months for the central bank’s reluctance to cut rates. Senate Republicans confirmed Fed governor Stephen Miran to his seat on Monday night, and he was sworn in just before the Fed’s two-day meeting began on Tuesday morning. Miran, who is on unpaid leave as a senior economic adviser to Trump, has said he intends to return to the White House when his Fed term expires early next year.

Last month, Trump attempted to fire a Fed governor, Lisa Cook, the first-ever such removal effort, over alleged mortgage wrongdoing. Cook challenged the decision in court. A federal appeals court this week upheld a lower-court ruling that allowed Cook to remain in the job—and participate at the meeting.

Powell has said the president’s criticisms aren’t affecting how the Fed does its job. Markets have rallied in recent weeks, including after Powell indicated in a widely watched speech last month that a cut was more likely than not this week.

The cut should provide some immediate relief to consumers with credit-card balances and small businesses with variable-rate debt. Mortgage rates and other long-term borrowing costs are less sensitive to individual Fed moves, but have declined in recent weeks as investors anticipate a modest sequence of additional cuts.

The Fed cut rates by 1 percentage point between September and December 2024, lowering them from a two-decade high, to prevent unnecessary weakness to the economy after a substantial and broad decline in inflation. But officials paused cuts after that amid signs of stronger growth and potentially stickier inflation.

Officials are navigating an economy reshaped by sweeping policy experiments. Trump has imposed tariffs that far exceed those of his first term, raising costs for manufacturers and small businesses. The full effects on consumer prices remain unclear as companies adjust supply chains and pricing strategies. Sharper curbs on immigration could be contributing to a slower pace of job gains by reducing labor force growth.

Some policymakers have been more concerned about inflation, which has been running above the Fed’s target for more than four years. They worry that businesses and consumers could become more accustomed to price increases in ways that make inflation more persistent. They are also uneasy about making bolder commitments to lower rates at a time when stocks are hitting new records and new tax cuts might provide stimulus in the months ahead.

Others have expressed concern that the lagged impact of the Fed’s aggressive moves to combat inflation with big rate hikes in 2022-23 will lead to undesirable weakness in the labor market, particularly amid softness in the rate-sensitive housing sector.

Several of these officials acknowledge that tariffs may temporarily push up prices. But they warn that higher costs from imported goods and materials could sap hiring as firms shield profit margins from the hit delivered by tariffs. In addition, taxes on imports will rob consumers of purchasing power as firms pass along higher costs.

Fed officials have debated how to manage those tradeoffs all year long. In leading his colleagues to cut rates, Powell is making a calculation that the risks from inflation may be easier to manage and that the Fed should accept more inflation risk to prevent deeper cracks from imperiling the labor market.

The picture on employment has shifted notably since officials last met in late July. Back then, payroll gains were reported to have averaged 150,000 a month over the three months ending in June. That figure has since been revised down to 96,000. It declined further to 29,000 in the three months ending in August.

Officials aren’t sure how much those figures reflect weaker demand, because immigration restrictions could also be reducing the number of people available to work. The unemployment rate edged up to 4.3% in August. The unemployment had held between 4% and 4.2% over the preceding year.

Meanwhile, inflation has ticked up in recent months. A key measure of underlying inflation that excludes volatile food and energy prices edged up to 2.9% in July from 2.6% in April, which was a four-year low. That measure stood at 2.7% one year ago, when officials began to lower rates and began with a larger half-point rate cut.

“Even putting the politics aside, it’s a tough, very complex situation," said Donald Kohn, an economist who spent 40 years at the central bank and served as Fed vice chair during the 2008 financial crisis.

There are some tariff-exposed goods with price increases that central bankers might be able to ignore as a “one-off," said Kohn, but firmer services inflation is “harder to look through, and gives reason to be cautious about how fast you want to cut."