• The Federal Reserve cut its benchmark interest rate for the second time in 2025, lowering it to around 3.9%.
  • Chair Jerome Powell emphasized that persistent inflation remains a key concern, with core inflation at 2.9% as of August.
  • The Fed's policy approach remains data-dependent, balancing inflation risks against a marked slowdown in hiring.

Federal Reserve Chair Jerome Powell reinforced that managing the risk of more persistent inflation remains paramount for monetary policy, even as the central bank continues its easing cycle. The Federal Open Market Committee cut the benchmark interest rate from 4.1% to approximately 3.9% this week, marking the second reduction in 2025.

"The risk of more persistent inflation needs to be managed," Powell stated in his post-meeting remarks, emphasizing that recent data showing core inflation at 2.9% reflects mainly the impact of tariffs on goods prices. He noted there's little evidence of broader inflationary pressures, but the Fed remains vigilant.

The decision comes amid what Powell described as a "marked slowdown in hiring," though unemployment remains historically low. This shift in labor market dynamics has prompted the Fed to reassess its risk balance, now leaning more toward employment downside risks while maintaining focus on price stability.

Policy decisions will be based on the "ongoing balance of risks rather than a predetermined path," Powell said, underscoring the committee's data-dependent approach. The Fed may soon halt the reduction of its $6.6 trillion balance sheet, a move that could put downward pressure on longer-term interest rates.

Internal disagreement within the FOMC was evident, with at least one official dissenting in favor of a larger rate cut while others urged maintaining stability. The debate reflects broader uncertainty about the appropriate pace of easing given that inflation expectations remain somewhat elevated in the near term, though longer-term measures align with the Fed's 2% target.

Consumers are already seeing benefits from the easing cycle, with mortgage rates falling to around 6.2% from 6.6% in August. The rate cuts could further lower borrowing costs for mortgages and auto loans, providing support to economic growth amid softer hiring conditions.

Rental and housing costs are reportedly falling across the U.S., contributing to the expected disinflationary trend. However, Powell faces political headwinds, with some administration officials criticizing the Fed's emergency bond purchases during the pandemic.

The Fed's current stance represents a significant shift from its aggressive tightening in 2023-2024, when rates peaked at 5.3% in response to the most significant inflation spike in four decades. Market participants now anticipate a potential third rate cut in December 2025, though Powell emphasized this would depend entirely on incoming data.

Correction: An earlier version of this article misstated the current unemployment rate. The rate remains low, though hiring has slowed.