Federal Reserve lowers interest rates by 0.25 percentage points in first cut since December

The Federal Reserve on Wednesday lowered its benchmark interest rate by 0.25 percentage points — its first cut since December — as the U.S. grapples with a stalling labor market and slower economic growth. 

The Fed cut reduces the federal funds rate — what banks charge each other for short-term loans — to between 4% and 4.25%, down from its prior range of 4.25% to 4.5%. The last time the central bank eased borrowing costs was in December 2024, when it also trimmed rates by a quarter of a percentage point.

The move comes as the Fed contends with a two-fold economic challenge: curbing inflation, which has flared in recent months, while supporting job growth, which has slumped. The Fed typically seeks to tame inflation by nudging up interest rates to slow economic growth, while cutting rates in periods when the economy is faltering to encourage consumer spending and business investment. 

In acting to lower interest rates, the Fed is signaling that it views the slowing labor market as a more pressing concern than rising prices, as Fed Chair Jerome Powell underlined at his Jackson Hole address last month in Wyoming. 

"Although labor demand is softening, labor supply issues continue to offset the weakness, and recession risks remain limited for now," said Seema Shah, chief global strategist at Principal Asset Management, in an email before the announcement. "A more measured 25 basis point cut remains the appropriate response, allowing the Fed to get ahead of a slowdown without overreacting to early signs of strain."

The rate cut comes amid intense political pressure on the Fed, with President Trump repeatedly accusing Powell of moving too slowly to ease borrowing costs and shore up economic activity. 

Mr. Trump is also seeking to put his imprint on the Fed. To that end, he has sought to remove Fed Governor Lisa Cook from her seat on the central bank's board, alleging that she engaged in mortgage fraud. She has denied committing fraud and challenged Mr. Trump's authority to fire her, with an appeals court ruling Monday that Cook can keep her job.

An economic adviser to Mr. Trump, Stephen Miran, was confirmed by the Senate on Monday to take an open spot on the Fed's Board of Governors. He will also sit on the 12-member Federal Open Markets Committee, or FOMC, which sets interest rates for the Fed.

"Stephen Miran was a last-minute addition to the FOMC, but his vote won't drastically alter the outcome. He joined too late to submit an economic projection and path for monetary policy," Oxford Economics analysts said in a report this week ahead of the Fed's rate cut.

Powell has defended the Fed's historical independence from political influence, emphasizing that monetary policymakers make decisions based on economic data. 

A key question for consumers and businesses is whether the Fed trimming borrowing costs for the first time in nearly a year augurs additional cuts in 2025 and heading into 2026. Fed officials have two more meetings this year, set for October and December. 

"I'm leaning more towards expecting a rate cut at each of the remaining meetings this year," Lon Erickson, portfolio manager at Thornburg Investment Management, said in an email prior to Wednesday's announcement. "We will continue to see a softening labor market. The wild card remains inflation."