Fed cuts interest rates by 0.25%, signals further reductions through year-end

On Wednesday, the United States’ Federal Reserve (Fed) announced a 0.25% reduction in interest rates, with signals that further cuts may be on the way for the remainder of the year, in response to signs of weakness in the labour market. This decision, widely supported by the Federal Reserve’s board, including appointees from President Donald Trump, aims to stimulate economic activity amid growing concerns.

However, Stephen Miran, the newly appointed Fed Governor who started his role on Tuesday, disagreed with the decision, suggesting a more aggressive 0.50% cut.

The new rate now stands at 4.00%-4.25%, marking the first reduction since December 2024. Further cuts are expected in two more meetings this year.

Jerome Powell, Fed Chairman, stated in the press conference that in the short term, inflation risks remain tilted upward, while the risks to employment are tilted downward. This presents a challenge for monetary policy. He stressed that the labour market is weakening, and the Fed aims to prevent any further slowdown.

Economic and inflation outlook

The latest assessment by the Fed indicates that inflation is expected to end this year at 3%, above its target of 2%. Unemployment is forecast to remain at 4.5%, while economic growth has been slightly revised upwards to 1.6%, from a previous forecast of 1.4%.

Compared to prior assessments, the Fed sees the risk of stagflation—high inflation combined with economic stagnation—beginning to ease. It believes that quicker interest rate cuts could help mitigate the risks of rising unemployment, and inflation is expected to gradually slow next year.

The Fed also agrees that Trump's import tariffs might only have a temporary impact on inflation, aligning with the latest economic forecast.

Diverging views and political pressure

While the rate cut decision received backing from several Fed governors, including Christopher Waller and Michelle Bowman, who previously opposed keeping rates unchanged, Miran continues to argue for more significant cuts. His forecast suggests that interest rates could fall as low as 2.875% by the end of 2025, significantly below the committee's average expectations.

Another Fed Governor, Lisa Cook, also participated in this vote, despite facing attempts by the Trump administration to remove her from the position. Cook remains in her role after receiving support from two courts.