The Federal Reserve lowered interest rates by a quarter of a percentage point on Wednesday as officials signaled that two more cuts could follow this year in light of rising risks confronting the labor market.
The decision to lower borrowing costs for the first time since December shifts interest rates to a range of 4 percent to 4.25 percent. The decision was not unanimously supported, the second straight meeting that featured at least one dissent from a member of the Board of Governors.
Stephen Miran, President Trump’s pick to join the Fed who was sworn in just minutes before the start of the central bank’s two-day meeting on Tuesday, voted in favor of a half-point reduction.
The decision to cut marks a turning point for the central bank, whose officials have been locked in an intense debate about the right time to provide some relief to borrowers when its goals of low, stable inflation and a healthy labor market are in tension with one another.
Inflation picked back up over the summer and appears poised to continue accelerating this year as a result of Mr. Trump’s tariffs. The labor market, while still solid, has started to flash more ominous signs.
Jobs growth has sharply slowed, with monthly gains averaging just 29,000 over the three-month period ended in August. In May, the average stood around 130,000 positions. While consumers are still spending and the unemployment rate remains stable at 4.3 percent, sluggish hiring has raised concerns that the labor market is now much more vulnerable than earlier in the year.
In its policy statement, the Fed acknowledged that its views on the labor market had changed, saying that policymakers now judge that the “downside risks to employment have risen.”
Against this backdrop, new projections released on Wednesday showed that most officials expect another half a percentage point reduction in interest rates this year, which would bring borrowing costs to a range of 3.5 percent to 3.75 percent. There are two more meetings left this year, scheduled for October and December. That is a more substantive decline than what officials estimated in June. Still, seven of the 19 policymakers penciled in fewer cuts this year, suggesting the forthcoming decisions could be divisive.
The dot plot tracking individual officials’ views on interest rates had two notable entries for 2025. In what is considered a “soft dissent,” one policymaker signaled support for interest rates to have stayed at the previous level of 4.25 percent to 4.5 percent this year. On the other extreme, one policymaker penciled in a steep drop in interest rates by the end of the year to a range of 2.75 percent to 3 percent. While the forecasts are anonymous, that is likely to have been Mr. Miran’s estimate.
By the end of 2026, most officials expected interest rates to decline another quarter of a percentage point, to a range of 3.25 percent to 3.5 percent. Through the end of 2028, they expected interest rates to remain just above 3 percent. Officials maintained that over a longer time horizon, the so-called neutral rate, which neither speeds up nor slows down demand, had steadied at 3 percent.
Wednesday’s projections also showed that most officials expect the economy to grow 1.6 percent this year, slightly higher than June’s estimate. They also predict unemployment to rise to 4.5 percent, matching their estimates of three months ago.
Officials simultaneously held their year-end forecast for “core” inflation, which strips out volatile food and energy prices and is seen as the most accurate gauge of underlying price pressures, at 3.1 percent, but raised their expectations for 2026 compared to June’s forecast. Now, they expect core inflation to settle at 2.6 percent by the end of next year. Only in 2028 do they have inflation returning to the Fed’s 2 percent target.
The Fed is having to balance competing economic risks and difficult policy debates while contending with a relentless pressure campaign from Mr. Trump and his allies to slash borrowing costs. These dynamics have made for a highly unusual Fed meeting.
Mr. Miran, who most recently served as chair of the Council of Economic Advisers, was approved by the Senate to join the Fed only the night before the meeting began, reflecting the president’s desire to have him in place in time to vote on interest rates. In an unorthodox arrangement, Mr. Miran has said he would take only a temporary leave of absence from his White House role while serving as a Fed governor.
Another governor, Lisa Cook, spent the day before the meeting defending her right to participate after taking Mr. Trump to court for trying to fire her.
The attempted ousting, which has no historical precedent, has kicked off an intense legal battle that will have far-reaching consequences for the institution and its ability to set interest rates free from political meddling. Late on Monday, a panel of judges ruled 2-1 that Ms. Cook could stay on as a governor while her lawsuit contesting her firing is litigated. The White House is expected to soon appeal the ruling to the Supreme Court.
The Fed has been careful about how it has handled Mr. Trump’s attacks, a cautious approach that is now being scrutinized as the institution’s independence comes under its most extreme threat in decades.
The Fed has said it would abide by any court decision in Ms. Cook’s case.
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
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