USA Today
The Federal Reserve announced its first rate cut of the year, bringing its key interest rate down to a range of 4% to 4.25%.
After nine months of staying on the sidelines, the Federal Reserve on Sept.17 announced a quarter-percentage-point cut, likely the first in a series of reductions to usher in lower borrowing rates for consumers.
The rate cut – the Fed’s first since late 2024 – lowers the Fed’s benchmark interest rate to a range of 4% to 4.25%. Officials signaled the possibility of two more rate cuts this year.
Typically, the Fed hikes rates or keeps them steady to tame inflation. The central bank lowers rates to juice the economy. While the Fed previously held back on rate cuts due to inflation concerns, a series of disappointing jobs reports showed a weakening labor market. While there are signs that tariffs are starting to show up in consumer prices, Powell previously said a “reasonable base case” is that tariffs spur a one-time price shift rather than a more persistent inflationary effect.
“Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated,” the Fed said in a Sept. 17 statement.
New Fed Governor Stephen Miran dissented, saying he preferred a half-percentage-point cut.
It was the first meeting to include Miran, President Donald Trump’s pick to fill a vacancy on the Federal Reserve board of governors. He was narrowly confirmed on Sept. 15. Fed Governor Lisa Cook also participated in the meeting after an appeals court gave her permission to continue her duties as she battles Trump’s move to fire her.
In a related action, the Board voted to approve a quarter percentage point decrease in the primary credit rate to 4.25%.
Powell watching FICO scores after 2-point drop
During a press conference after the decision, Powell said he is watching FICO scores after the average score fell 2 points in 2025.
He said while he doesn’t think the September rate cut alone will have a visible effect on consumers’ credit, the stable prices, strong economy, and strong labor market the committee is targeting “should help” over time.
What does the rate cut mean for mortgage rates?
Powell said while the Fed’s rate decisions tend to impact mortgage rates, the Fed would likely need to launch “pretty big” rate changes for it to matter “a lot” for the housing sector.
“There’s a deeper problem here, not a cyclical problem the Fed can address, and that’s pretty much a nationwide housing shortage,” Powell said, “A lot of places in the country just don’t have enough housing for people.”
He added that achieving maximum employment and price stability – which can require higher interest rates – can promote a strong economy, which is “a good economy for housing.”
The average 30-year fixed-rate mortgage averaged 6.35% as of Sept. 11, according to Freddie Mac.
Addressing a ‘low firing, low hiring’ job market
Powell said the September rate cut presumably will be better for a “low firing, low hiring” labor market that is particularly challenging to navigate for recent college graduates, younger people, and minorities.
“The concern is if you start to see layoffs, there won’t be a lot of hiring going on,” which would lead to higher unemployment, Powell added.
Powell refuses to comment on Lisa Cook case
Powell refused to comment on Fed Governor Lisa Cook’s legal battle with President Donald Trump over his move to fire her from the board.
“I see it as a court case that it would be inappropriate for me to comment on,” Powell said.
Powell says Fed continues to work independently
Despite pressure to cut rates from President Donald Trump, Powell said the Fed will continue to work independent of politics.
“It’s deeply in our culture to do our work based on the incoming data and never consider anything else,” Powell said.
If the FOMC made decisions based on political outcomes, Powell said “you would be able to tell” by the way he and other governors spoke about the committee’s decisions.
“I don’t think we will ever get to that place,” Powell said. “(We’re) doing our work exactly as we always have now.”
Powell talks about tariffs’ impact on labor market, inflation
Powell said it’s “certainly possible” tariffs are driving the slowdown in the labor market, but immigration likely plays a bigger role.
“There’s very little growth, if any, in the supply of workers. And at the same time, demand for workers has also come down quite sharply,” Powell said.
As for inflation, Powell said “a reasonable base case” is that tariffs’ effects on inflation will be relatively short-lived. It’s the Fed’s job, he said, to make sure the one-time increase in prices doesn’t become an ongoing inflation problem.
“We have begun to see goods prices showing through into higher inflation. And actually, the increase in goods prices accounts for most of the increase in inflation, or perhaps all of the increase in inflation, over the course of this year,” Powell said, adding that the effects so far are small but are expected to build over the course of the year and into 2026.
Powell says Fed is committed to independence
Powell kept his response short when asked about whether the recent appointment of Miran, who has ties to the executive branch, would compromise the Fed’s independence from day-to-day politics.
“The committee remains united in pursuing our dual mandate goals,” Powell said. “We’re strongly committed to maintaining our independence, and beyond that, I really don’t have anything to share.”
Miran said he would take an unpaid leave of absence from his role as chairman of the White House Council of Economic Advisers while serving on the Fed’s board of governors.
What did the dot plot reveal?
Nine Fed officials went with a rate between 3.5% and 3.75% for 2025. One went with a rate between 2.75% and 3.0%. Six went with a rate between 4.0% and 4.25%.
Estimates for 2026, 2027, 2028, and the longer run all show members estimating lower rates under 4.0%.
Why did the Fed stop cutting interest rates?
The Fed began to hike interest rates in 2022 to cool rapid inflation, which hit a peak of 9.1% that June. Rates rose from nearly 0% to a two-decade high of 5.25% to 5.5% in July 2023.
The Fed began to trim rates in 2024 as inflation cooled, but has so far this year held rates steady as officials waited to see how Trump’s tariffs impact consumer prices.
Will there be more rate cuts in 2026?
The Fed is set to release its quarterly dot plot, which outlines where officials believe interest rates will move next.
The estimates “will be closely scrutinized,” Nationwide Chief Economist Kathy Bostjancic wrote in a note, “particularly to see” if the median interest rate estimate still calls for two quarter-point cuts by year’s end.
Economists are split on whether the Fed will cut rates two or three times this year, according to a Bloomberg survey.
The Fed could also shift its predictions for 2026. Last quarter, Fed officials projected just one quarter-point cut for the year. Bostjancic expects that to double to a total of 50 basis points cut, while the bond market is pricing in cuts totaling 75 basis points.
Are any Fed officials expected to dissent?
While most economists expect a quarter-point reduction in September, some Fed officials may push for a more aggressive rate cut.
Governors Christopher Waller and Michelle Bowman, Trump appointees who dissented for a cut in July, as well as newly appointed Stephen Miran could dissent for at least a half percentage point cut, according to a note from economist Michael Feroli of JP Morgan.
There’s also a chance a regional Fed president or two vote for steady rates, according to a Sept. 12 note from Deutsche Bank Research economists, who say the decision is “unlikely to be unanimous.”
The meeting has the potential to be the first with three dissenting governors since 1988.
Jobs market shows signs of weakness
The U.S. economy added a disappointing 22,000 jobs in August, according to the Bureau of Labor Statistics. The unemployment rate hit 4.3%, the highest level since October 2021, while revisions show the economy shed 13,000 jobs in June, the first month of job losses since December 2020.
Other reports also suggest the jobs market is weakening. The jobs report for July revealed gains for the previous two months were revised down by an eye-popping 258,000. Another report from the Bureau of Labor Statistics published Sept. 9 showed firms hired nearly a million fewer workers than previously estimated in the 12-month period ending in March.
Trump ordered the firing of U.S. Commissioner of Labor Statistics Erika McEntarfer shortly after the weak July jobs report was published, accusing her without evidence of manipulating the data.
How high is inflation?
Consumer prices accelerated modestly in August at 2.9%, according to the Labor Department, while core inflation ‒ which excludes more volatile items like food and energy ‒ held steady at 3.1%.
While inflation has cooled significantly since its 2022 peak of 9.1%, it remains above the Fed’s 2% target.
US stocks ahead of Fed decision
Wall Street’s main indexes opened subdued on Sept. 17 ahead of the Fed’s widely anticipated decision.
The Dow Jones Industrial Average was up 0.47% Wednesday morning, while the tech-heavy Nasdaq slipped 0.38% and the benchmark S&P 500 was down 0.094%.
The Fed meeting will be a test of Wall Street’s recent rally, with the S&P 500 and the Nasdaq hitting record highs in the last six sessions, boosted by rate-cut expectations and revived enthusiasm around AI-stock-linked trading.
Investors say the resumption of Fed rate cuts can add to Wall Street’s rally, though such a boost would depend on whether lower interest rates could help the U.S. economy avoid a downturn.
How are tariffs affecting the Fed’s rate decisions?
Tariffs pose a challenge to the Fed because they are expected to both increase consumer prices and curb growth, leaving the Fed torn between its dual mandate to support stable prices and maximum employment. Recent reports indicate the labor market is weakening while inflation remains above the Fed’s 2% target.
Recent economic data “pushes the FOMC (Federal Open Market Committee) into an uncomfortable position,” Scott Anderson, BMO Capital Markets’ chief U.S. economist, said in a Sept. 11 note.
How much is the Fed expected to cut?
The CME FedWatch tool suggests a 94% chance of a quarter percentage point cut in September and 6% chance of a half percentage point cut from the current range of 4.25% to 4.5%.
Fed funds futures markets are betting on three rate cuts total this year. More than 40% of economists in a recent Bloomberg survey agree, although the survey’s median respondent anticipates just two. Those respondents were divided on whether the second would happen in October or December.
Is Lisa Cook at the Fed meeting?
An appeals court on Sept. 15 ruled that Fed Governor Lisa Cook can carry on her duties as she battles President Donald Trump’s attempt to remove her from the central bank in court.
The Trump administration has accused Cook of committing mortgage fraud by claiming two properties as her primary residence, and says this allows Trump to fire Cook “for cause.” Cook has denied wrongdoing and has not been charged with a crime.
Recent reporting by Reuters showed Cook has claimed her second property as a vacation home, and appears to counter the documents cited by Cook’s critics.
Trump’s unprecedented move to fire Cook – the first Black woman on the Fed’s board – has raised concerns over the central bank’s independence from politics. Trump has demanded the Fed make aggressive rate cuts, and in August said he was expecting to soon have a majority of appointees on its board who would lower interest rates.
Will Stephen Miran be at the Fed meeting?
The Senate on Sept. 15 confirmed President Donald Trump’s pick to join the Fed’s board of governors, just one day ahead of the two-day rate decision meeting.
Stephen Miran, chairman of the White House Council of Economic Advisers, is set to fill the empty seat left by former Fed Governor Adriana Kugler, who stepped down from the role in August. Both he and Cook will cast votes at the September meeting.
Miran’s appointment has spurred concerns over the Fed’s independence from politics. Trump has demanded the Fed make aggressive rate cuts, and in August said he was expecting to soon have a majority of appointees on its board who would lower interest rates.
Miran has maintained that he will be committed to preserving the Fed’s autonomy and told lawmakers he is “very independently minded.”
BMO Capital Markets deputy chief economist Michael Gregory expects Miran to call for at least a half percentage point cut.
“Amid the likely decision to cut rates by 25 bps (basis points), we’ll probably see at least one dissenting vote in favour of a larger reduction,” Gregory said in a Sept. 17 note.
When was the last Fed rate cut?
The benchmark federal funds rate has remained unchanged at 4.25% to 4.5% since December, when the Fed last announced a quarter percentage point drop.
Why does the Fed adjust interest rates?
The Fed adjusts interest rates to support stable prices and maximum employment.
When inflation is high, the Fed can raise rates to make borrowing more expensive and cool economic activity. When the labor market is weak, cutting rates can promote economic growth and hiring by making borrowing less expensive.