TMTPOST -- The Federal Reserve on Wednesday announced its first rate cut of the year, bringing its key interest rate down to a range of 4% to 4.25%.
The quarter-point reduction is the Fed’s first rate cut since late 2024. Officials also signaled the potential for two additional cuts before the year ends. The central bank, which began raising rates in 2022 to combat soaring inflation, had paused further cuts earlier this year due to ongoing inflation risks. However, recent data revealing a softening labor market prompted a change in direction.
"Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated," the Fed stated on Wednesday in its official release.
The labor market has shown signs of strain. In August, the U.S. added just 22,000 jobs—well below expectations—while June saw a downward revision with a net loss of 13,000 jobs. The unemployment rate now stands at 4.3%, the highest since October 2021.
In a related move, the Fed’s Board also approved a quarter-point cut to the primary credit rate, lowering it to 4.25%.
This latest decision came during the first meeting attended by new Fed Governor Stephen Miran, appointed by U.S. President Donald Trump. Miran dissented, advocating for a larger, 50 basis point cut. Also present was Governor Lisa Cook, who participated following a court ruling that allowed her to continue her duties amid ongoing legal challenges tied to Trump’s efforts to remove her from the Board.
While inflation has eased significantly since peaking at 9.1% in June 2022, it remains above the Fed’s 2% target. August consumer prices rose by 2.9%, with core inflation, excluding food and energy, steady at 3.1%.
Fed Chair Jerome Powell has previously said a “reasonable base case” is that tariffs contribute to a one-time price increase rather than a sustained inflationary surge. Still, officials are closely watching how Trump's trade policies impact future pricing pressures.
The Fed is expected to release an updated dot plot —a projection of future interest rate paths—later this week. These estimates “will be closely scrutinized,” noted Nationwide Chief Economist Kathy Bostjancic, “particularly to see” if the outlook still includes two additional cuts in 2025.
Economists remain divided. A Bloomberg survey found mixed views on whether there will be two or three total cuts this year. For 2026, the Fed previously projected only one rate cut, but Bostjancic believes that could double. Meanwhile, bond markets are pricing in up to 75 basis points in total cuts.
Wall Street Reacts
Markets were cautious ahead of the Fed announcement. The Dow Jones Industrial Average rose 0.47% Wednesday morning, while the Nasdaq slipped 0.38%, and the S&P 500 edged down 0.094%.
The decision tests Wall Street’s recent rally, with the Nasdaq and S&P 500 having hit record highs in the past six sessions amid optimism over rate cuts and renewed enthusiasm for AI-linked stocks.
Investors hope the Fed’s return to rate cuts will bolster the rally—provided the easing helps the economy sidestep a recession. According to the CME FedWatch tool, there was a 94% probability priced in for a quarter-point cut and a 6% chance of a 50 basis point move.
Futures markets are leaning toward three cuts in total for 2025. Still, a plurality of economists in Bloomberg’s survey expect two, with disagreement on whether the second will arrive in October or December.
Bank of Canada Also Cuts Rate by 25 BPs
In a parallel move, the Bank of Canada also reduced its key interest rate by 25 basis points to 2.5%, its first cut since March. The decision comes amid mounting economic pressure, softening job data, and declining inflation.
"Considerable uncertainty remains. But with a weaker economy and less upside risk to inflation, Governing Council judged..." said Governor Tiff Macklem in his opening remarks during a news conference.
Macklem pointed to a range of recent developments influencing the unanimous decision, including a weakening labor market and slower inflation, particularly as retaliatory tariffs on U.S. goods were lifted.
"The Canadian economy is being affected by both U.S. tariffs and the unpredictability of U.S. trade policy," Macklem said.
Canada’s GDP declined in the second quarter, and exports to the U.S. dropped after firms initially stockpiled goods in anticipation of tariffs. Businesses have since scaled back investment.
Jonathon Azzopardi, owner of Laval Tool in Tecumseh, Ontario, expressed skepticism about the impact of the cut. "It's not going to make anybody jump out of their seat and start doing investments. Like, let's not fool ourselves — that's likely not going to happen, right?" he told CBC News.
Canada has lost over 100,000 jobs in the past two months, pushing the unemployment rate to 7.1%. Macklem noted that employers across various sectors are holding off on hiring due to economic uncertainty.
While consumer spending held up in the second quarter, Macklem warned that ongoing labor market weakness could drag it down. He added, however, that "we're not expecting a recession" under current U.S. trade policies—though he acknowledged the outlook could deteriorate if tariffs intensify.
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