Fed lowers interest rates by 0.25 percentage points in first cut since 2024

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.

Federal Reserve officials are also penciling in two more rate cuts in 2025, but only one in 2026, according to the central bank’s summary of economic projections. That may disappoint Wall Street, with investors before the meeting projecting a total of five cuts over the rest of the year and 2026.

According to those median projections, Fed officials expect the nation’s unemployment rate, currently 4.3%, to reach 4.5% by year-end before ticking down to 4.4% in 2026 and 4.3% the following year.

Personal Consumption Expenditures (PCE) — the Fed’s preferred gauge of inflation — is forecast to level off at 3% this year, well above the central bank’s 2% annual target, before receding to 2.6% next year and 2.1% in 2027. The median projections for core inflation, which strips out volatile food and energy costs, forecasts PCE of 3.1% this year.

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.

“Recent indicators suggest that growth of economic activity moderated in the first half of the year,” the Fed said in its statement. “Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.”

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.”