The Federal Reserve (Fed) announced on Wednesday that it had cut its benchmark interest rate by 25 basis points (0.25%) for the first time this year. This is interpreted as a response to signs of a weakening labor market, which have become more significant than concerns about high inflation.

The Fed's decision to lower interest rates for the first time since December 2024 has reduced the federal funds rate to the range of 4% to 4.25%. This cut comes after the Fed had held rates steady at its previous five meetings this year amidst economic uncertainty.

The Fed projected the median expectation for the year-end benchmark interest rate to be 3.6%, a downward revision from the 3.9% forecast in June. This suggests two more 0.25 percentage point rate cuts are anticipated within the year. Two FOMC meetings remain in 2024: October 28-29 and December 9-10.

The newly released dot plot shows that 12 out of the 19 Fed officials anticipate interest rate cuts by the end of the year.

Two officials expected only one rate cut, while nine anticipated two rate cuts (0.50%p). Among them, one projected a year-end interest rate of 2.75%-3.00%, indicating an expectation for an additional 1.25 percentage point reduction.

Policymakers have been monitoring economic data that shows slowing employment as businesses grapple with changes in trade and immigration policies, while inflation remains elevated and has shown an upward trend in recent months, with tariff-related price increases reflected in inflation data.

This dynamic has presented a challenge for policymakers in achieving the Fed's dual mandate of promoting maximum employment and stabilizing prices at the Fed's 2% inflation target.

The Federal Open Market Committee (FOMC), which sets the Fed's monetary policy, stated in its announcement that job growth has slowed and unemployment has risen but remains at relatively low levels, and that inflation has eased but still remains somewhat elevated. The FOMC added that it is monitoring both sides of its dual mandate, noting "increased downside risks to the outlook for employment."

Newly appointed Fed Governor Jeffrey M. M. had been the sole dissenter in an 11-1 vote by the FOMC, reportedly advocating for a 50 basis point cut.

Jerome Powell had previously stated that if inflation and labor market indicators both move away from their targets, policymakers would focus on the indicator that is moving further from its target.

Powell began his press conference by saying the Fed remains focused on its two mandate goals, and recent economic conditions suggest that growth is slowing.

"Overall, the significant slowing in both labor supply and demand is unusual. In such a less dynamic and somewhat sluggish labor market, there appear to be increased downside risks to employment. Inflation has eased significantly from its mid-2022 peak, but it remains somewhat elevated relative to our long-run goal of 2%," stated Chair Powell.

Chair Powell reiterated his concern that tariff-related price increases, while potentially a one-time shift in the price level, could lead to more persistent inflation problems. He explained that the Fed's "mandate is to ensure that a one-time jump in the price level does not lead to a persistent inflation problem."

"Price increases have started to translate into higher inflation. In fact, price increases may be accounting for most, perhaps all, of the increase in inflation this year. The impact is not large currently, and we expect it to continue into next year," Powell said.

Powell stated that while the Fed believes the upward trend in inflation will be a one-time price increase due to tariffs, the central bank cannot take that for granted when reviewing monetary policy.

"But we can't just assume that," he said. "Our mandate is literally to make sure that doesn't happen, and we will execute that mandate."

Powell noted that about 0.3 to 0.4 percentage points of the current core PCE inflation rate of 2.9% can be attributed to the impact of tariffs. He stated that while most exporters are not passing on tariffs to prices, evidence of some pass-through to consumers, albeit slow and small in scale, is clear.

By Sung Ku Hong, Editor-in-Chief, NNP / Special Correspondent for this paper NNP info@newsandpost.com