The Federal Reserve voted to lower interest rates by one-quarter percent to a target rate of 4-4.25%. The Federal Open Market Committee said its decision was based on slow job growth, an unemployment rate that has ticked up but remains low, and inflation the committee described as elevated.
“Recent indicators suggest that growth of economic activity moderated in the first half of the year,” the FOMC said in a statement.
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Federal Reserve Chair Jerome Powell went into detail about the labor market’s impact on the decision. He explained that the recent pace of job creation appears to be running below the break even point needed to hold the unemployment rate steady. According to the St. Louis Federal Reserve Bank, the current break even job creation rate is between 32,000 to 82,000 jobs per month. The economy only added 22,000 jobs in August, and the unemployment rate was 4.3%. The Fed expects unemployment to hit 4.5% by the end of the year.
Powell also said GDP rose at a rate of about 1.5% for the first half of 2025, down from 2.5% 2024. He said the reduction in growth is due to a slow down in consumer spending.
Powell said the Fed will continue to monitor the simultaneous drop in hiring and job seeking. Job growth is decreasing partly due to lower immigration and labor force participation.
This move was widely expected by analysts. In fact, CME FedWatch, which surveys interest rate traders, said a rate cut was certain. They predicted a 96% chance of a quarter-point cut, and a four percent chance of a half-point cut.
This Fed decision does not automatically change the cost of borrowing for consumers looking for a mortgage or loan, but it does reduce how much banks pay to borrow money from the Fed, savings that could be passed on to their customers.
Eleven of the 12 FOMC members voted in favor of the quarter-point reduction. Stephen Miran, who was recently appointed by President Donald Trump, said the rate should have been lowered by a half-percent. Powell said there was no widespread support for a half-point rate cut.
Lisa Cook, the board member whom Trump attempted to fire, was in attendance and voted for the quarter-point reduction.
The FOMC also said it will take other steps to get to its target inflation rate of 2%, including reducing its Treasury Securities holdings and mortgage-backed securities.
