On 17/9, the US Federal Reserve (Fed) lowered its benchmark interest rate by 25 basis points (0.25%) to 4-4.25%. This is the first rate cut under President Donald Trump's second term, following a 9-month pause due to uncertainties surrounding the new administration's major policies.
However, in the post-meeting press conference, Fed Chair Jerome Powell stated that the US economic outlook remains unclear. "It is not entirely clear what needs to be done", he said.
Despite this uncertainty, the Fed proceeded with what Powell called a "risk management cut". Policymakers felt they could not wait any longer for the full impact of Trump's policies to become apparent. "We have to look forward, not just in the rearview mirror", Powell explained.
The Fed's decision was not unanimous. Governor Stephen Miran, nominated by Trump and confirmed just a day before the meeting, voted against the cut. He favored a more aggressive reduction of 0.5 percentage points.
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Traffic on Fifth Avenue in New York City (USA). Photo: Reuters |
Traffic on Fifth Avenue in New York City (USA). Photo: Reuters
In its updated economic forecast, the Fed factored in the possibility of two more rate cuts this year, potentially by another 0.25 percentage points each in October and December. Fed officials also expect growth this year to reach 1.6%, up from the 1.4% forecast in June.
Meanwhile, unemployment and inflation forecasts remain unchanged from June's estimates. The year-end unemployment rate is projected at 4.5%. The personal consumption expenditures (PCE) index, the Fed's preferred inflation gauge, is forecast at 3% this year and 2.6% next year.
Powell emphasized that rising labor market risks were the primary reason for the rate cut, despite the potential for Trump's import tariffs to push prices higher. He described the current labor market as "low hiring, low firing".
Powell pointed to high unemployment among young workers as a consequence of low hiring. The Fed's statement also explicitly noted "increased risks to employment". "The concern is that if layoffs start to pick up, there won't be many new jobs to offset them", Powell said.
The Fed is facing a dilemma as both of its mandates—price stability and full employment—are under pressure. Prices of goods affected by import tariffs, such as furniture and appliances, have risen in recent months. Powell acknowledged the impact of tariffs on prices "has not been large at this point" but cautioned that the full effects have yet to be seen.
The consumer price index (CPI) in August rose 2.9% year-on-year, in line with analysts' expectations. For several months, consumer inflation figures have largely matched forecasts, despite the disruptions caused by import tariffs.
However, the employment outlook remains the Fed's top priority. "There is a real risk of significant deterioration in the labor market. But we also need to remember that an unemployment rate of 4.3% and GDP growth of 1.5% suggest the economy is not in terrible shape", Powell explained.
He also asserted that the Fed is not acting too late. The 17/9 decision is seen as a preemptive measure against potential future weakening of the labor market.
However, analysts believe the Fed's move is unlikely to satisfy the US president. For months, Trump has sought to influence the famously independent institution. He has publicly criticized the Fed and Powell for not cutting rates. Trump even wants rates reduced by "a couple of percentage points".
In the press conference, Powell was also asked about the Fed's independence with Miran, a White House staffer, serving as a Fed governor. "We just welcomed a new member, and as always, the committee remains united in pursuing our dual mandate. We are strongly committed to maintaining our independence", he responded.
As the Fed grapples with a complex economic picture, its powerful board of governors has seen unprecedented upheaval in recent months. The future of Governor Lisa Cook remains unclear, even after an appeals court ruled this week that Trump cannot fire her over allegations of mortgage fraud.
Democrats have also expressed concerns about Miran's close relationship with the president, noting he is technically still a White House employee, on unpaid leave to serve on the Fed board until the end of his term in late January. Miran, however, has maintained that he will offer independent economic views at the Fed.
Ha Thu (according to Reuters, CNN)
