Fed Shaves Benchmark Rate As Powell Warns That 'There Are No Risk-Free Paths'

The Federal Reserve cut its benchmark interest rate by 25 basis points Wednesday. 

The widely expected move was the first bit of relief the Fed offered to borrowers this year. It comes amid signs of a softening economy that has left the central bank grappling with both sides of its dual mandate of maintaining maximum employment and price stability.

All but one member of the Federal Open Market Committee voted in favor of Wednesday’s decision. Stephen Miran, who joined the board Tuesday, voted for a 50-basis-point cut. 

Powell said the economy remained strong but that weakness in the job market has left the central bank without a clear direction to steer interest rates.

“There are no risk-free paths now. It's not incredibly obvious what to do,” Powell said. “We have to keep our eye on inflation. At the same time, we cannot ignore and must keep our eye on maximum employment. Those are our two equal goals.”

The new dot plot released Wednesday as part of bimonthly economic forecasts leaves the door open for up to two additional rate cuts in 2025, with a majority of FOMC members putting the target midpoint for the federal funds rate at the end of this year between 3.5% and 4%. 

But seven of the 19 Fed governors who participated in the survey put the target midpoint at or above 4%, essentially in line with the rate after Wednesday's decision, which investors largely predicted — CME Group’s FedWatch tool on Tuesday forecast a 96% chance of a 25 bps cut.  

Yields for 10-year Treasury bonds fell to their lowest point since April ahead of the Federal Open Market Committee meeting Wednesday. 

The decision to cut rates comes despite inflation running well ahead of the Fed’s 2% target rate. Overall inflation in August rose 40 basis points to 2.9%. Core inflation, which strips out volatile sectors, was 3.1%, according to consumer price index data released this month. 

Fed officials previously pointed to what had looked like strong job growth as justification for keeping rates steady to help combat price growth. But there are signs that the jobs market is less resilient than reporting had indicated. Earlier this month, the Bureau of Labor Statistics revised its data to cut 911,000 jobs from the total it previously said had been created in the year ending in March.  

“A 25 basis point cut suggests that the Fed is trying to strike a balance — acknowledging emerging labor market weakness while remaining cautious on inflation,” Trepp Chief Economist Rachel Szymanski said in an email. “It’s a signal of flexibility, not a full pivot.”

Wednesday’s decision to move the federal funds rate to a range between 4% and 4.25% has already largely been baked into markets. Bond yields have fallen in September after a series of revisions to economic reports pared back reported job growth in the last year, giving investors confidence that the Fed would ease monetary policy. 

Powell described the divergent trends in inflation and labor markets as “quite an unusual situation.” A majority of Fed governors in the central bank’s updated projections said uncertainty around GDP growth had grown, and there is broad consensus that the risks to economic growth are weighted to the downside. 

Forecasts from Fed members around inflation and unemployment are coalescing on the high end of what had been a wider range of projections. Two-thirds of Fed members expect core inflation to come in between 3.1% and 3.2% in 2025, with a 60 bps gap between the high and low end of forecasts. 

Unemployment ticked up to 4.3% in August, but Powell said the labor market is in a curious balance where the number of jobs and the number of job seekers were both declining, with both being pushed down by tariffs and immigration policy.

“In the near term, risks to inflation are tilted to the upside and risk to employment to the downside, a challenging situation,” Powell said. “When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate. With downside risks to employment having increased, the balance of risks has shifted.”

Fed officials continue to forecast that the Trump administration’s tariff regime will result in one-time, transitory price hikes. But Powell said that businesses were passing costs down to consumers at a slower pace and that the pace of inflation remained within expectations. 

“Tariffs will turn out to be a one-time price increase, as opposed to creating an inflationary process. That's been our forecast,” Powell said. “We can't just assume that, though. Our job is literally to make sure that that is what happens. And we will do that job.” 

Powell faced questions from reporters about the politics surrounding the central bank, which is supposed to be independent from the federal government. 

He declined to comment on the White House’s effort to fire Fed Governor Lisa Cook and brushed off criticism from Treasury Secretary Scott Bessent, who has said the Fed has suffered from mission creep and should face an internal review. 

“We're certainly open to constructive criticism and ways to do our jobs better,” Powell said, declining to endorse any investigation.

He was also asked about answers Miran, who was most recently a senior economic adviser at the White House, gave during his Senate confirmation hearing, where he said the Fed had what he described as a third mandate to moderate long-term interest rates. 

“We think moderate long-term interest rates are something that will result from stable inflation,” Powell said. “We haven't thought about that for a very long time as a third mandate that requires independent action, so that’s where that is.”