The United States Federal Reserve has lowered interest rates for the first time since December, reducing the benchmark range to between 4% and 4.25%, the lowest level since November 2022. The move comes as the central bank seeks to stabilise a faltering labour market, despite inflationary pressures linked to President Donald Trump’s ongoing tariff policies.
The decision, announced on Wednesday, follows months of economic uncertainty and political tension. Federal Reserve Chair Jerome Powell cited slowing job gains and increased risks to employment as key factors behind the rate cut. “Job gains have slowed and the downside risks to unemployment have risen,” Powell stated during a press conference. He also acknowledged that inflation had begun to accelerate.
Powell warned that while it is “reasonable” to expect a one-off rise in prices due to tariffs, there remains a risk that inflationary effects could prove more enduring. “Our obligation is to ensure that a one-time increase in the price level does not become an ongoing inflation problem,” he said.
The rate cut has drawn criticism from President Trump, who has repeatedly accused the Fed of acting too slowly and has called for a more substantial reduction. Trump’s economic policies, particularly the imposition of tariffs, have contributed to rising consumer prices. Inflation rose to 2.9% in August, up from 2.3% in April, with the Yale Budget Lab estimating that tariffs will cost the average household approximately $2,300.
Political tensions within the Federal Reserve have intensified in recent weeks. Last month, President Trump attempted to dismiss Fed Governor Lisa Cook, alleging mortgage fraud involving the misrepresentation of primary residence status on loan applications. Cook has denied any wrongdoing and maintains that the president lacks the authority to remove her. Both a federal judge and an appeals court have blocked the dismissal, though the matter is now before the Supreme Court.
Separately, Fed Governor Adriana Kugler, appointed by President Biden, resigned unexpectedly in August. Her departure paved the way for the appointment of Stephen Miran, Chair of the Council of Economic Advisors, who was confirmed by the Senate on Monday. Miran was the sole dissenting voice in the Fed’s latest decision, advocating for a deeper rate cut of half a percentage point.
The Federal Reserve faces a delicate balancing act. Lowering interest rates may stimulate borrowing and investment, but risks fuelling further inflation. Powell had previously signalled a possible rate cut during his speech at the Jackson Hole symposium in August, citing immigration and trade policy uncertainties as major economic headwinds.
Recent labour data has underscored the Fed’s concerns. Revisions to May and June figures revealed 258,000 fewer jobs added than initially reported. Although August saw a modest improvement, the unemployment rate rose to 4.3%, the highest level since 2021.
Economists remain divided over the long-term impact of Trump’s tariffs. While some anticipate a temporary spike in prices, others warn of more persistent inflationary pressures. The spectre of stagflation, a scenario characterised by rising prices and increasing unemployment looms large.
For now, Federal Reserve officials appear more focused on stabilising the labour market, even as inflation continues to outpace earlier projections. The director of the Congressional Budget Office told CNBC that tariffs have already driven prices higher than expected, adding further complexity to the Fed’s policy decisions.
