Federal Reserve Lowers Interest Rates Due to Employment Worries
The US Federal Reserve (Fed) has lowered interest rates by 25 basis points, as concerns over employment outweigh the current inflation rate that remains above 2%. The decision came during a meeting where only new Fed Governor Stephen Miran voted against the move, advocating for a larger 50 basis points reduction.
All 11 other voting members of the rate-setting Federal Open Market Committee (FOMC) supported the quarter-point cut, which brings the new benchmark lending rate to between 4% and 4.25%. The Fed stated that "downside risks to employment have risen," even as inflation has "moved up and remains somewhat elevated."
Manufacturers have been pushing for lower rates for over a year, with higher borrowing costs making buying new equipment more expensive. The slowing job gains and incremental increase in the unemployment rate have added to the pressure on the Fed to act.
Despite the rate cut, the Fed is not on a preset path, according to central bank chief Jerome Powell. He emphasised that decisions will be based on incoming data, the evolving outlook, and the balance of risks. The Fed lifted its 2025 growth forecast to 1.6% from June's 1.4% projection, indicating a slightly stronger economic outlook.
Economists had expected more division among the FOMC members as policymakers walk a tightrope balancing inflation and labor market risks. However, the Fed made no changes to its unemployment and inflation forecasts, suggesting a cautious approach to future rate adjustments.
The unemployment rate remains low, despite the slowing job gains, according to the Fed. The Fed's decision to lower rates could potentially support the labor market, even though typically higher rates are held to bring inflation back to its 2% target.
The Fed noted that it faces competing pressures in adjusting rates, with Trump's sweeping tariffs fueling inflation risks. Despite these pressures, the Fed has penciled in two more cuts this year, signalling its commitment to maintaining a balanced economic outlook.
In conclusion, the Fed's decision to lower interest rates by 25 basis points reflects its efforts to address employment concerns while managing inflation risks. The central bank will continue to monitor economic data closely and make decisions based on the evolving outlook and balance of risks.
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