Fed Resumes Rate-Cut Cycle After Nine Months With 25 Bps Reduction; Sees Two More This Year

The US Federal Reserve has resumed its much-awaited rate-cut cycle after nine months, as it has slashed the benchmark lending rates by 25 basis points, and sees two more cuts by 2025-end.

The key rates have been re-adjusted to 4–4.25%, according to a statement issued by the Federal Open Market Committee at the end of its two-day meeting on Wednesday.

The outcome is in line with the market expectations, as there was a 93.7% probability of a quarter-of-a-percentage point rate cut, and 6.3% chance of a jumbo 50-basis-point reduction, according to CME FedWatch.

The FOMC decision was not unanimous, as Fed Governor Stephen Miran dissented in favour of lowering the rates by 50 bps.

The Fed is likely to remain on the rate cut trajectory for the remainder of the calendar year, as its median projection shows half-a-percentage point of more rate trimming in 2025.

The “Dot plot” of rate projections, as shared by the monetary policy body, reaffirms this, but projects only a quarter point cut in 2026. By 2028, the median forecast shows the federal funds rate will be at 3.1%.

Labour Market Concerns

The Powell-led panel noted that downside risks to employment have risen. The admission comes in the backdrop of US jobless claims jumping to its highest in the last four years. The unemployment rate also rose to a nearly four-year high of 4.3% in August.

"Recent indicators suggest that growth of economic activity moderated in the first half of the year. Job gains have slowed, and the unemployment rate has edged up but remains low," the FOMC said.

As per the Fed's median forecast, the unemployment rate is likely to stand at 4.5% in 2025, and at 4.4% in 2026.

"Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen," the FOMC noted.

Notably, Fed had kept its benchmark lending rates unchanged in the range of 4.25-4.5% since December. The pause came with the onset of Donald Trump's presidency, as his policies that targeted imports and immigration were expected to trigger inflation.

However, the prospects of a tilt in Fed's view became clearer with the release of recent economic data, that showed benign inflation along with a dwindling pace of job growth.

The Powell-led panel has also faced a barrage of criticism from Trump, who has questioned the Fed's decision-making and blamed it for slowing the country's economic growth by keeping the interest rates high.

The pressure on Fed was evident in July FOMC meeting as well, when Governors Christopher Waller and Michelle Bowman had dissented against the majority's decision to keep the rates unchanged.