Fed cuts rates 25 basis points as Powell warns of cooling jobs market

Federal Reserve rate changes seldom surprise, and Wednesday’s nearly unanimous vote to lower the benchmark interest rate by a quarter point was no exception. The move aims to cushion a slowing labor market as inflation stays stubbornly above target.

The rate cut, the first in nine months, sets the federal funds target range at 4% to 4.25%. Alongside lowering short-term borrowing costs, policymakers also signaled continued efforts to shrink the Fed’s balance sheet by trimming Treasury and mortgage-backed securities. This dual strategy combines immediate support for the economy with ongoing steps to moderate financial conditions over the long term.

In updated projections released with the decision, officials forecast modest GDP growth of 1.6% this year and 1.8% in 2026. They expect unemployment to rise to 4.5% before edging lower. Inflation is projected to recede only gradually. The Fed does not expect to hit its 2% inflation goal until 2028.

At his press conference following the board’s vote, Fed Chair Jerome Powell described the move as driven less by current data than by shifting risks.

“You could think of this in a way as a risk-management cut,” he said, noting that job growth has slowed dramatically to an average of just 29,000 per month. “The labor market is really cooling off, and that tells you it’s time to take that into account in policy.”

Powell acknowledged that unemployment is still relatively low at 4.3% but warned of mounting downside risks. Younger workers, recent graduates, and minorities are already struggling to find jobs, he said, while overall hiring has slowed to unusually low levels.

Jobs 'a growing concern'

“In a healthier labor market, there would be jobs for those people. That’s been a growing concern over the last few months,” Powell added.

Inflation, meanwhile, has ticked higher this year. Core personal consumption expenditures (PCE) prices rose 2.9% in August. Powell blamed higher goods prices tied to tariffs. He argued those effects are likely to prove temporary.

“Our obligation is to ensure that a one-time increase in the price level does not become an ongoing inflation problem,” he said.

A show of independence

Financial analysts and Fed watchers expected the quarter-point rate cut. However, some were heartened by the Fed’s show of independence, given President Trump’s recent criticism of both Powell and the Fed.

Despite one dissent for a larger cut from newly Trump-appointed Governor Stephen Miran, who was sworn in just moments before the start of the Fed meeting, the decision underscored both the board's broad consensus and its determination to maintain independent policy judgment in the face of recent political scrutiny.

“The best news from this 25-basis point rate cut announcement is that there was a near-unanimous consensus at the Fed,” said Robert R. Johnson, Heider College of Business, Creighton University. “That was good news for those concerned about the independence of the Fed and the potential for greater politicization of the US central bank.“

Johnson noted that the Fed has moved its focus from its price stability mandate to its full employment mandate.

“He indicated that labor demand has softened, and the unemployment rate has edged up, while acknowledging that downside risk to employment has risen and inflation has eased significantly from its highs but remains above the Fed's 2% goal.”

The Fed is clearly emphasizing its full employment mandate over its price stability mandate, Johnson said.

“Powell stated that higher tariffs have begun to push up prices, the longer-term effects are yet to be seen,” he said. “The balance of risks has shifted to concern about employment.”

Cut expected to fuel a rally

Asset Managers said the rate cut should continue to fuel a rally in tech and utility sectors.

Any market pullback would be a buying opportunity, not a reason to pivot,” said CEO Tom Hulick of Strategy Asset Managers. “With capital flowing into tech, utilities, and industrials, while headwinds mount for consumer cyclicals and healthcare due to tariffs and inventory buildup, we’re staying positioned for where the market is going, not where it’s been.”

Motley Fool Asset Management Senior Investment Analyst Shelby McFaddin said small and mid-cap growth stocks could be the biggest beneficiaries of the Fed’s move.

“Small-cap companies are outperforming the S&P 500 by a margin of at least two to one,” McFaddin said. “Potential for this trend to continue presents a compelling opportunity for investors seeking diversification beyond the dominant large-cap names."

Meanwhile, the Fed’s unusual dilemma—slowing jobs alongside sticky inflation—has left policymakers with little margin for error.

“When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate,” Powell said. “With downside risks to employment having increased, the balance of risks has shifted.”

Cuts not a 'present course'

That balancing act was reflected in the committee’s projections for interest rates. The median forecast sees the federal funds rate falling to 3.6% by year-end, 3.4% in 2026 and 3.1% in 2027—slightly lower than in June. Powell emphasized the forecasts are not a “preset course” but snapshots of 19 officials’ best judgments.

Still, investors heard a clear signal that the Fed is prepared to ease further if the job market falters.

“Policy is not on a preset path,” Powell said. “We remain well-positioned to respond in a timely way to potential economic developments.”

Looking ahead, Powell reiterated the Fed’s commitment to restoring 2% inflation while supporting maximum employment.

“Our success in delivering on these goals matters to all Americans,” he said. “Everything we do is in service to our public mission.”

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