Fed cuts interest rates in response to a slowing job market
Maneuvering between a rock, a hard place, and a president pushing for unprecedented influence over monetary policy, the nation’s central bank moved to lower interest rates for the first time this year. On Wednesday, the Federal Reserve cut its benchmark rate by a quarter of a percentage point and projected two more cuts this year.
The move – which puts the target range for its main lending rate at 4% to 4.25% – signals that the Fed is prioritizing the propping up of a slowing economy over its fight to keep inflation low. The Fed’s aim is to perk up the economy by making it cheaper to borrow money.
But the reality? Don’t expect fireworks.
Why We Wrote This
The Federal Reserve’s mission, outlined by Congress, is to spur job growth while keeping inflation under control. Its objectives have grown trickier this year amid political pressure from the White House, a slowing job market, and still-high inflation.
“You can think of this, in a way, as a risk management cut,” Fed Chair Jerome Powell said during a news conference following the rate cut announcement. He added that a “very different picture” of risks is emerging as the job market has begun to cool off, compared with the threats of inflation.
A cut by the Fed “does not produce an immediate miracle,” says Brett House, an economics professor at Columbia Business School. “Changes in monetary policy take somewhere between a year to two years to fully work their way through the economy,” he adds, with most of the effect happening in the first year.
Even in normal times, many consumers and businesses don’t benefit immediately from a lowered rate. And even then, the effect is iffy. The Fed only controls conditions for short-term loans. Markets determine the rates for the longer-term loans that businesses and consumers often take out.
But these are not normal times. Even without the highly dramatic and public pressure from President Donald Trump, the central bank faces an unusual combination of factors. The economy is slowing while interest rates are rising. Left unchecked, that combination could lead to a period – reminiscent of the early 1970s – of high inflation and economic stagnation, or stagflation.
The current levels of unemployment and inflation are far lower than in the 1970s – “stagflation-esque” rather than true stagflation, says Mark Zandi, chief economist of Moody’s Analytics. But the direction of the trends is worrying.
Adding to the Fed’s difficulties is a dramatic and highly public conflict with the White House. The central bank, which had been lowering rates under the previous administration, hit the pause button in January after three consecutive cuts since September 2024. Mr. Powell said he wanted to assess the inflationary impact of Mr. Trump’s controversial tariffs before further lowering rates.
Frustrated, the president began publicly berating Mr. Powell, his own appointee, for not cutting interest rates fast enough. As Mr. Powell ignored the attacks, Mr. Trump moved to replace Fed board members with his own appointees.
On Tuesday, White House economic adviser Stephen Miran was sworn in as a new governor, on leave from his post as chair of the Council of Economic Advisers. Mr. Miran is completing four months left on a term for a Fed governor who resigned last month. His appointment is the third for Mr. Trump on the 12-member rate-setting committee.
The president has meanwhile pushed to oust a fourth member, Lisa Cook, with his administration alleging possible mortgage fraud. Ms. Cook has denied the charges. An appeals court has ruled she can continue her role as a governor because the administration’s charges alone don’t give Mr. Trump the authority to oust her.
The latest Fed cut is unlikely to do much to boost the economy quickly. The most immediate effect is on bond markets, which often adjust even before a cut is announced. The market has been anticipating a quarter-percentage-point cut for September for some time.
Good for college loans, not refinancing homes
The next group affected is holders of short-term variable debt. That includes credit-card customers who carry month-to-month balances. It also includes existing homeowners who borrow from their home-equity line of credit. Both groups will see almost immediate relief as their monthly payments go down.
But there’s no sure help for mortgage-holders looking to refinance or those hoping to buy a house. Ditto for major corporations looking to borrow.
That’s because the Federal Reserve sets only the shortest of short-term rates: the federal funds rate is what banks charge each other to borrow funds overnight. That rate, in turn, is closely tied to the prime rate. That’s the rate banks often use to price small business loans as well as home equity lines of credit, credit card debt, student loans, and auto loans.
Fed can try, but bond market rules
But much of corporate and consumer debt, such as corporate bonds and household mortgages, is priced according to longer-term interest rates. Those rates depend on the bond market, the buyers and sellers of private as well as government debt. And the bond market marches to its own drummer. A year ago, for example, worried the Fed was moving too fast, bond traders pushed up long-term rates even as the Fed was cutting the federal funds rate.
The reaction of the bond market going forward will be key for many consumers and businesses reliant on long-term rates. In the immediate aftermath of Wednesday’s cut, short-term rates fell, as expected. But medium- and long-term rates notched up.
The Fed hopes its rate cut “will cascade in a lowering of the yield curve” across the board, including those long-term rates, says Mr. House of Columbia. “But it has no control.”
Editor’s note: This story was updated Sept. 17, the day of initial publication, with additional information, including from the Federal Reserve press conference.
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