Federal Reserve Initiates Initial 2025 Interest Rate Decrease, Citing Potential Job Market Threats
The US Federal Reserve announced a quarter-point reduction in its benchmark lending rate on Wednesday, bringing the range to 4% to 4.25%. Eleven voting members of the rate-setting Federal Open Market Committee (FOMC) supported the decision, with the Fed indicating that two further cuts are expected later this year.
The rate cut comes amidst intensified pressure from the Trump administration, which has been vocal about its desire for lower interest rates. In August, President Donald Trump moved to fire Fed Governor Lisa Cook, sparking a legal battle that could have broader implications for the Fed. A federal appeals court ruled that Cook could remain in position while challenging her removal.
The Fed Chair, Jerome Powell, emphasized the central bank's commitment to preserving its independence from political influence. However, the confirmation of new Fed Governor Stephen Miran, who served as the Chairman of the White House Council of Economic Advisers, has raised concerns about political influence in Fed decisions. Miran, who voted for the Fed rate cuts in July, has come under fire from Democratic lawmakers for taking a leave of absence from his White House role.
The rate cut was not unanimous, with only new Fed Governor Stephen Miran voting against, favoring a larger rate reduction of 50 basis points. This decision reflects a "stark divide" among Fed officials on the need for additional cuts this year, as noted by economist Michael Pearce.
The Fed's decision to lower interest rates is in response to a slowdown in job gains and an increase in the unemployment rate. The unemployment rate has inched up, and job gains have slowed, indicating a weakening labour market. However, the Fed stated that downside risks to employment have risen, while inflation has picked up and remains somewhat elevated.
The Fed has lifted its 2025 growth forecast to 1.6% from June's 1.4% projection. Policymakers are balancing inflation and labour market risks as they mull changes to interest rates. Among 19 Fed officials assessing the path of monetary policy, seven projected no further reductions.
The Trump administration plans to appeal Cook's case, potentially bringing it to the Supreme Court. Miran's confirmation risks giving a sense of political influence over Fed decisions, which could have long-term consequences for the central bank's independence and its ability to make unbiased decisions in the best interests of the economy.
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