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Hear that? A tsunami-sized sigh of relief just swept across the US now that the Federal Reserve has finally decided to cut rates for the first time this year.
After two tense days of deliberations, the Federal Open Market Committee announced its decision to slash rates by a quarter-point to a range of 4.00% to 4.25%.
Although this news was no shocker, escalating pressure from President Trump and a weakening economy have kept investors on their toes. The Fed also signaled that two additional cuts are in the cards before the end of the year—one more than central bankers expected back in June.
Fed Chair Jerome Powell maintained that the labor market was the main driver of today’s cut, explaining during the press conference, “Kids coming out of college, and younger people, minorities, are having a hard time finding jobs.” But he maintained that these cuts didn’t arrive “too late” as Trump loves to say, stating, “I think we were right to wait.”
One small cut, one huge step for the Fed
The central bank’s 11-to-1 vote revealed less dissent in the ranks than anticipated. The only outlier was Trump appointee Stephen Miran, who was sworn in mere minutes before deliberations began yesterday. He voted for a deeper half-point cut, although Powell noted that the FOMC’s new guy didn’t get much backup, saying, “There wasn't widespread support at all for a 50-basis-point cut this week.”
Although today’s FOMC dot plot map suggests we’ll see a total of three rate cuts in 2025, 2026 is a different story. Markets were anticipating two to three more rate cuts next year ahead of today’s meeting, but the dot plot revealed that the FOMC thinks there will be just one cut in 2026—a conservative stance that spooked investors this afternoon.
“The dot plot indicates a path of two more quarter point interest rate cuts in 2025, but significant dispersion in 2026, with some looking for significant cuts while others expect none,” senior investment strategy director at Seattle-based US Bank Asset Management Rob Haworth told Brew Markets. “The equity market initially cheered the move toward more rate cuts this year, but may be concerned about the dispersion of 2026 expectations.”
So, what’s next?
The economy continues to complicate the Fed’s juggling act of tempering inflation without undermining the job market. Unemployment crept upward in August to 4.3%, its highest level since 2021, and judging by Powell’s press conference, the labor market is becoming the Fed’s primary concern. But don’t forget that consumer prices just rose 2.9% year over year to a seven-month high, and Fed officials are still worried that tariffs might spark inflation to run a bit hotter than previously expected in 2026.
“The Federal Reserve is now stuck between a soft landing and a hard place with a weakening labor market, yo-yo consumption, and confusion over whether 3% inflation has taken up semi-permanent residence,” explained Running Point Capital Advisors Chief Investment Officer Michael Ashley Schulman.
One thing is for certain: Today’s interest rate cut doesn’t mean the Fed drama is over. If anything, it’s only just begun.—JD