U.S. Federal Reserve cuts key rate for first time this year

A seal is seen before U.S. Federal Reserve Chairman Jerome Powell walks out to speak during a news conference following the Federal Open Market Committee meeting,, at the Federal Reserve Board Building in Washington. (AP Photo/Jacquelyn Martin)

WASHINGTON — The U.S. Federal Reserve cut its key interest rate by a quarter-point Wednesday and projected it would do so twice more this year as concern grows at the central bank about the health of the nation’s labor market.

The move is the Fed’s first cut since December and lowered its short-term rate to about 4.1 per cent, down from 4.3 per cent. Fed officials, led by Chair Jerome Powell, had kept their rate unchanged this year as they evaluated the impact of tariffs, tighter immigration enforcement, and other Trump administration policies on inflation and the economy.

Yet the central bank’s focus has shifted quickly from inflation, which remains modestly above its 2 per cent target, to jobs, as hiring has grounded nearly to a halt in recent months and the unemployment rate has ticked higher. Lower interest rates could reduce borrowing costs for mortgages, car loans, and business loans, and boost growth and hiring.

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“In this less dynamic and somewhat softer labor market, the downside risks to employment appear to have risen,” Powell said at a press conference following the Fed’s two-day meeting.

Fed officials also signaled that they expect to reduce their key rate twice more this year, but just once in 2026. Before the meeting, investors on Wall Street had projected five cuts for the rest of this year and next. Stocks wavered a bit as Powell took questions from reporters. The S&P 500 was down 0.1 per cent as of 3:10 p.m. ET.

Just one Fed policymaker dissented from the decision: Stephen Miran, who President Donald Trump appointed and was confirmed by the Senate in a rushed vote late Monday just hours before the meeting began. Miran preferred a larger half-point cut, but Powell told reporters there wasn’t “very much support” for the bigger-size cut among Fed officials.

Many economists had forecast there would be additional dissents, and the meeting’s outcome suggests that Powell was able to patch together a show of unity from a committee that includes Miran and two other Trump appointees from his first term, as well as a Fed governor, Lisa Cook, whom Trump is seeking to fire.

The Fed is facing both a challenging economic environment and threats to its traditional independence from day-to-day politics. At the same time that hiring has weakened, inflation remains stubbornly elevated. It rose 2.9 per cent in August from a year ago, according to the consumer price index, up from 2.7 per cent in July and noticeably above the Fed’s 2 per cent target.

It’s unusual to have weaker hiring and elevated inflation, because typically a slowing economy causes consumers to pull back on spending, cooling price hikes. Powell suggested last month that sluggish growth could keep inflation in check even if tariffs lift prices further.

Separately, Trump’s attempted firing of Cook is the first time a president has tried to remove a Fed governor in the central bank’s 112-year history, and has been seen by many legal scholars as an unprecedented attack on the Fed’s independence. His administration has accused Cook of mortgage fraud, but the accusation has come in the context of Trump’s extensive criticism of Powell and the Fed for not cutting rates much faster and steeper.

An appeals court late Monday upheld an earlier ruling that the firing violated Cook’s due process rights. A lower court had also previously ruled that Trump did not provide sufficient justification to remove Cook. Also late Monday, the Senate voted to approve Miran’s nomination, and he was quickly sworn in Tuesday morning.

On Tuesday, Trump said Fed officials “have to make their own choice” on rates but added that “they should listen to smart people like me.” Trump has said the Fed should reduce rates by three full percentage points.

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When asked what the signs would be that the Fed is no longer functioning independent of political pressure, Powell said, “I don’t believe we’ll ever get to that place. We’re doing our work exactly as we always have now.”

In their projections for the economy and monetary policy, most Fed officials forecast the central bank’s key rate in a range of 3.5 per cent to 3.75 per cent by year end. Miran, however, forecast a rate of 2.75 per cent to 3.0 per cent.

The Fed’s move to cut rates puts it in a different spot from many other central banks overseas. Last week, the European Central Bank left its benchmark rate unchanged, as inflation has largely cooled and the economy has seen limited damage, so far, from U.S. tariffs. On Friday, the Bank of England is also expected to keep its rate on hold as inflation, at 3.8 per cent, remains higher than in the United States.

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Christopher Rugaber, The Associated Press