Federal Reserve Cuts Rates for First Time This Year

September 16th, 2025
Andrew Lu

Last week, the Federal Reserve took a step that will shape the trajectory of the U.S. economy heading into the election year: it lowered its benchmark interest rate by a quarter percentage point, bringing the target range to 4.00–4.25 percent. This move, the first cut since December 2024, reflects a shift in priorities. Inflation remains above the Fed’s two-percent target, but signs of a weakening labor market compelled the central bank to act. As the Associated Press reports, Chair Jerome Powell framed the decision as “risk management,” an effort to prevent softening job growth from spiraling into broader unemployment.

At its core, this cut highlights the tension between the Fed’s dual mandate. On one side, consumer prices are still climbing at roughly 2.9 percent, and tariffs on imported goods threaten to push costs even higher. Some economists warn of stagflation if the Fed eases too quickly while inflation lingers. On the other side, Powell emphasized that job creation is slowing to a pace barely sufficient to keep unemployment from rising. CNBC analysts underscored that a few more weak months could push joblessness above 4.5 percent (CNBC, Sept. 17, 2025). In this light, the Fed chose to lean toward protecting employment even at the cost of temporarily tolerating higher inflation.

The decision was not unanimous. Newly appointed Governor Stephen Miran dissented, pressing for a half-point cut. Politico reports that his position reflects both his own dovish views and the political context of a White House eager for faster growth. The split highlights a broader concern: the perception of political pressure on the central bank. NPR pointed out that tensions have escalated since the administration attempted to sideline Governor Lisa Cook, raising questions about whether the Fed can maintain its credibility as an independent institution.

Markets reacted with the volatility one might expect. Stocks initially surged on the promise of cheaper credit but later pulled back, while Treasury yields drifted lower. Morgan Stanley now forecasts four consecutive quarter-point cuts, betting that Powell will move more aggressively than he currently projects. Many small businesses are locked in debt during the high-rate years of 2023 and 2024, and those obligations will not suddenly become cheaper. The benefits of easing may therefore take time to filter through the economy.

The risks of this policy are clear. Lowering rates while inflation is still above target risks eroding the Fed’s credibility. Powell is making a “credibility gamble,” betting that inflationary expectations will remain anchored even as policy loosens. Unfortunately, if layoffs accelerate, the Fed may be forced into a cutting cycle sharper than planned, reinforcing the sense that it is behind the curve.

Still, Powell insists that the Fed remains guided by data, not politics or market pressure. In this sense, the September cut should be seen less as a surrender to inflation than as a cautious attempt to preempt recessionary dynamics. Whether it proves successful will depend on the next several months of labor and inflation data. For now, the Fed is walking one of the narrowest tightropes in its modern history—trying to defend jobs without losing the fight against prices.