Washington: The US Federal Reserve's decision to cut the federal funds rate by 25 basis points to the range of 4% to 4.25% could mark a pivotal shift in US monetary policy, as the central bankers attempt to navigate the delicate balance between supporting a slowing job market and containing current inflation pressures.
According to Anadolu Agency, Fed Chair Jerome Powell described the decision as a "risk-management cut" in his post-meeting press conference, implying that it was an insurance policy against further slowing in the job market. Powell and the Fed noted that the downside risks to employment appear to have risen, in contrast to the downside risks to price stability. While lower borrowing costs might benefit households and businesses, it's uncertain if this will support job growth or potentially revive price increases, ushering in a new era of American economic growth.
The decision followed weak employment data in recent weeks. The number of open jobs in the US fell to 7.18 million in July, the lowest level since September 2024, while private sector employment increased by a lower-than-expected 54,000 jobs in August. Non-farm employment rose by only 22,000 jobs in August, falling short of expectations, and the unemployment rate increased to 4.3%, the highest since October 2021. First-time unemployment benefit claims also rose by 27,000 to 263,000 in early September, reaching their highest level since October 2021. Additionally, the Bureau of Labor Statistics revised its employment statistics, revealing 911,000 fewer nonfarm jobs were created in the 12 months ending in March 2025 than initially reported.
Max Gillman, a professor of economic history at the University of Missouri-St. Louis, told Anadolu that the rate cut will ease pressure on the labor market to some extent. He explained that the cut reduces the after-inflation interest rate, helping businesses to borrow from banks, and noted that the real estate market could find some relief, especially with the expectation of at least one more interest rate cut this year. Gillman highlighted that the decision will benefit the construction industry's labor market and increase consumer spending, contributing to overall economic growth and potentially avoiding a recession.
According to Jeffrey Frankel, an economics professor at Harvard University, while this is a minor change, it should slightly increase worker demand, all other things being equal.
On the inflation front, the US Producer Price Index (PPI) fell by 0.1% in August, the first monthly decline since April, though the PPI rose 2.6% year-on-year. Meanwhile, the Consumer Price Index (CPI) rose 0.4% month-on-month in August and 2.9% year-on-year, with annual inflation reaching its highest level since January. Gillman expressed confidence that the rate cut will not increase inflation significantly and will modestly benefit the economy, although he believes more rate cuts are necessary. He pointed out that large banks hold $3.3 trillion in Fed reserves, which could make future inflation uncertain.
Frankel suggested that further rate cuts are likely if GDP growth and employment continue to falter, but a sharp increase in inflation could reverse the trend. He remarked that the Fed might be "sacrificing higher prices for higher employment."
Gillman anticipated that the Fed will reduce rates at least once more this year, depending on inflation not rising much above its current 2.9%. He expects a series of interest rate cuts, potentially lowering the rate to at least 3.5%. The Fed, in its median projections, has forecast two more rate cuts this year, with only one in 2026, which is below market expectations.