The Federal Reserve cut its target interest rate by a quarter point Wednesday, reacting to weak job creation over the summer — against the backdrop of high drama over the central bank's leadership.
With President Trump clamoring for cheaper money, policymakers delivered the first rate cut of the year. But new projections showed little appetite for the deeper rate cuts the president seeks.
- A dissent from a new Trump appointee to the Fed shows growing divides within the world's most important central bank.
The policy-setting Federal Open Market Committee lowered its target range for the federal funds rate to 4 from 4.25%, adjusting rates for the first time since December.
- "Job gains have slowed, and the unemployment rate has edged up but remains low," the committee said in a statement. "Inflation has moved up and remains somewhat elevated."
- Stephen Miran, who was confirmed as a Fed governor Monday evening and is on leave of absence from his job as the top White House economist, dissented, preferring a half-point rate cut.
- Projections showed that the median Fed official anticipated two more cuts will be warranted this year, but only one additional rate cut in 2026 — not the multiple percentage points worth of rate cuts Trump has called for.
- Between the lines: That suggests there is consensus at the Fed toward reducing rates by a quarter-point at each of its remaining meetings this year.
One official — unnamed in the projections but almost certainly Miran — indicated they believe the target interest rate should be cut to 2.875% by the end of the year, or another 1.25 percentage point lower than the current policy setting.
- Two other Trump appointees to the board, Christopher Waller and Michelle Bowman, supported the quarter-point rate cut. Both had dissented against the decision in July to leave rates steady.
- Governor Lisa Cook voted for the rate cut. Trump is attempting to fire her over alleged mortgage irregularities, but a federal appeals court ruled late Monday she can continue serving as the case is litigated.
- Treasury Secretary Scott Bessent is interviewing candidates to replace chair Jerome Powell when his term is up in May.
Job growth came to a near-halt over the summer, and employers added only 27,000 jobs a month from May through August. That contrasts with 123,000 jobs a month added in the first four months of the year.
- But inflation pressures have remained elevated amid new tariffs. The Consumer Price Index was up 2.9% for the year ended in August, up from 2.7% in July.
The Fed leaders' economic projections, updated for the first time since May, showed only modest changes.
- The median official sees 1.6% GDP growth this year, up from 1.4% in June.
- The median projection for the unemployment rate was unchanged at 4.5% and for inflation unchanged at 3%.
- The Federal Reserve's recent quarter-point interest rate cut, lowering the federal funds rate to a range of 4% to 4.25%, has various implications for American consumers, primarily by influencing borrowing costs, savings yields, and broader economic activity. While the immediate effects may be modest and already partially anticipated by markets, it could provide some relief in a high-cost environment, though savers might feel the pinch. Below is a breakdown of the key impacts. Borrowing Costs This rate cut generally makes borrowing cheaper over time, as it reduces the benchmark that lenders use for many consumer products. For variable-rate loans, the changes can occur relatively quickly, encouraging spending and potentially stimulating economic growth. However, the overall impact on household finances is likely mixed, especially if the economy is faltering rather than thriving. - **Credit Cards**: Most credit cards have variable rates tied to the Fed's benchmark via the prime rate, so APRs could drop by about 0.25% to 0.5% in the coming months, though it might take several billing cycles to fully reflect. With average rates currently over 20%, this won't drastically reduce costs but could ease the burden for those carrying balances. - **Auto Loans**: New fixed-rate auto loans may become slightly more affordable, with average five-year rates around 7% potentially edging lower, boosting buyer sentiment and possibly leading to promotional deals from lenders. A single cut won't slash monthly payments significantly, but it could encourage more purchases amid sales events. - **Student Loans**: Federal loans have fixed rates that reset annually, so no immediate change for most borrowers. Private variable-rate loans, however, may decrease automatically, and ongoing cuts could open refinancing opportunities for fixed-rate private loans—though refinancing federal loans privately means losing benefits like income-driven repayment. ### Mortgages and Home Buying Mortgage rates, influenced by Treasury yields and economic expectations, have already declined this year (e.g., 30-year fixed rates at about 6.13%, down from over 7% in January), so this cut has largely been priced in and won't cause a sharp drop. Existing homeowners with fixed rates won't see changes unless they refinance, but prospective buyers might benefit from a gradually improving environment if more cuts follow, potentially easing affordability in a high-price housing market. Savings and Investments This is less favorable for savers, as yields on high-yield savings accounts (currently over 4%) and certificates of deposit (CDs) are expected to fall, reducing returns above inflation levels. Experts recommend locking in current high rates now via longer-term CDs before further declines. Broader Economic Effects The cut aims to support employment amid slowing job growth and rising unemployment, which could indirectly benefit consumers through better job prospects and wage stability. However, with inflation still above the 2% target, costs for goods and services may not ease quickly, tempering the overall relief. Multiple future cuts (potentially in October and December) would amplify these effects more substantially.
The Federal Reserve may be about to stimulate an economy growing at more than 3%, where stocks are at record highs and inflation remains above target. The problem is that no one knows for sure how far the U.S. central bank can go before it trips that wire.
Putting aside the intense political pressure, the fundamental arguments for Chair Jerome Powell to resume Fed rate cuts this week rest on the softening U.S. jobs market and ongoing problems with housing affordability, as well as concerns that the economy could head south by this time next year.
The extent of the jobs trouble is debatable, however, due to a halt to immigration, and the 'weakness' may have as much to do with labor supply as demand. The housing market also remains slightly distorted because the extraordinary drop in mortgage rates during the COVID-19 pandemic is making homeowners loath to sell.
On the flipside, U.S. retail sales are still booming at an annual rate of 5%, the stock market has roared to record highs, broad financial conditions are the loosest in three years, and inflation continues to run hot above target, whatever one assumes the enduring impact of trade tariffs.
Given this mixed bag, the Fed's best course of action may be to shift to neutral - a rate that neither spurs nor inhibits the economy. But, as ever, determining precisely where that holy grail may be is a complex and wonky task.
By some measures, a quarter-point cut this week would already push the Fed close to or even below neutral territory. A 50-basis-point (bps) move today, or the second 25-bps move in October that is currently 80% priced into markets, could already move the Fed into stimulative mode, raising questions about whether White House demands are already trumping traditional Fed assessments.
If only it were that simple.
SPECIAL GUEST STAR
A long-standing Fed model for determining the notoriously elusive neutral real rate - the Laubach-Williams gauge jointly developed by New York Fed boss John Williams - estimates this figure, dubbed 'R-star', is currently 1.37%.
If the midpoint of the Fed target range were to fall 25 bps to 4.125% later today, then the prevailing real funds rate based on the most recent core PCE annual inflation rate from July would fall to 1.225% - so mildly prodding but not super stimulative.
However, if consensus forecasts for core PCE in August play out at 2.7%, then the resulting real funds rate would remain a drag at 1.425%, reinforcing calls for more cuts.
But doves point to a revised R-star model from 2023 that is adjusted for pandemic-related supply distortions. It puts the neutral rate as low as 0.85%. Indeed, Williams himself recently suggested that the 'growth-adjusted' R-star may still be stuck around pre-COVID levels as low as 0.5%.
Assuming the revised Holston-Laubach-Williams estimate is the more correct reading, then policy would still be restrictive by at least 50 bps following a quarter cut today - and two more similar cuts by year-end would only then bring it back to neutral.
What's more, if something close to the Fed policymakers' median core PCE forecast of 2.2% for next year pans out, then a further 50 bps of easing would be warranted in 2026 just to remain neutral.
In total, then, some 125 bps of cuts through the end of next year would likely do the trick. Markets are priced for 150 bps, suggesting they assume the Fed will move into a stimulative mode by then.
So two models, and two very different narratives.
FED PLOTLINES
So much for the models. Watching what Fed policymakers themselves think may be more important, not least with changing personnel on the central bank's board.
With the caveat that the Fed's 'dot plot' predictions will be updated later today, the standing view from June's forecasts shows that Fed officials anticipated two cuts this year. Their equivalent 'neutral' long-term policy rate is 3%, translating into a 1% 'R-star' estimate.
Much of the focus on Wednesday will be on whether the median projection goes to three cuts from two this year, as markets are not yet fully priced for that shift.
But as it stands, a 1% long-term real neutral policy rate assessment is higher than the HLW model, and that part of the dot plot may well have an impact on market thinking today ,too.
With politics weighing heavily over the central bank, all this 'science' may end up being beside the point.
President Donald Trump's eye-popping demand for 1% policy rates suggests he has little time for models. Either that or he really meant to say 1% real rates, which would instead mean he thinks rates should really move quickly to 3.7%.
If that were true, then perhaps he's not so far off from market pricing or the Fed's direction of travel - but that's a very big "if".
