In a pivotal move long sought by President Donald Trump, the Federal Reserve on Wednesday reduced its benchmark interest rate by a quarter percentage point, setting the federal funds rate range at 4.00% to 4.25%, as it grapples with a softening labor market and easing inflation fears, as Breitbart reports.

This decision, marking the first rate cut since December 2024, comes after intense political pressure and internal debates, with Fed officials signaling potential further reductions this year amid mixed economic signals.

The rate adjustment follows months of steady policy in early 2025, driven by initial worries over tariff-induced inflation that ultimately did not emerge as expected.

Fed takes action

The Fed's action responds to recent data showing weakened labor conditions, with payroll gains averaging just 29,000 over the three months ending in August, a sharp drop raising recession concerns.

Additionally, revised June data revealed payrolls contracted for the first time since 2020, while more unemployed workers than job openings exist, a shift not seen since the pandemic recovery.

Interest-sensitive sectors like housing have also been declining for months, adding urgency to the Fed's decision to lower borrowing costs for immediate relief to variable-rate debt holders.

Labor market woes drive shift

Federal Reserve chair Jerome Powell noted a softening labor market, attributing slower job growth to immigration policy changes reducing worker supply, and declining business demand for labor.

He described this situation as a "curious balance," reflecting the complex dynamics the Fed must navigate to fulfill its dual mandate of price stability and full employment.

The Fed's statement highlighted moderated economic growth in the first half of the year, slowed job gains, and a slight rise in unemployment, though it remains low.

Inflation trends, tariff impacts assessed

While inflation rose 2.9% in August compared to last year, the fastest since January, Powell emphasized that tariff-related price increases have been slower and smaller than anticipated.

He clarified that such price hikes are expected to be one-time events rather than sparking ongoing inflation, with recent increases largely driven by goods prices.

Powell also noted that most 2025 inflation stemmed from the services sector, with tariff effects limited to specific categories like furniture and not broadly impacting consumer prices.

Internal divisions, political pressures

The rate cut decision was not unanimous, with Fed Governor Stephen Miran, newly confirmed and on unpaid leave from a White House role, dissenting in favor of a larger half-point reduction.

Governors Christopher Waller and Michelle Bowman, who opposed prior decisions to hold rates in July, aligned with the majority this time, though Powell indicated little support existed for a bigger cut.

The meeting carried significant political weight, with Miran viewed as President Trump's pick to challenge the Fed's consensus, amid broader questions about the central bank's independence from political influence.