Summary of Federal Reserve Chair Jerome Powell speaks after quarter-point interest rate cut — 9/17/2025
Federal Reserve Chair Jerome Powell delivered a detailed statement following the Federal Open Market Committee’s (FOMC) decision to cut the federal funds rate by a quarter percentage point to a target range of 4.00% to 4.25%. This move reflects a shift in the balance of risks facing the U.S. economy, particularly a softening labor market alongside somewhat elevated inflation.
Economic Overview and Monetary Policy Decision
- Labor Market: The unemployment rate has edged up slightly to 4.3% in August, with payroll job gains slowing dramatically to about 29,000 per month over the past three months. This slowdown is attributed largely to a decline in labor force growth due to lower immigration and reduced labor force participation. Both labor supply and demand have softened, creating an unusual labor market dynamic with increased downside risks to employment.
- Inflation: Inflation remains above the Fed’s 2% target, with total Personal Consumption Expenditures (PCE) inflation at 2.7% over the past year and core PCE inflation at 2.9%. Inflation for goods has risen, partly due to tariffs, while services inflation continues to ease. Near-term inflation expectations have increased somewhat, but longer-term expectations remain anchored near 2%.
- Economic Growth: GDP growth has moderated to about 1.5% in the first half of 2025, down from 2.5% the previous year, mainly due to slower consumer spending. Business investment, particularly in equipment and intangibles (e.g., AI-related investment), has picked up. Housing activity remains weak.
- FOMC Projections: The median forecast projects GDP growth of 1.6% in 2025 and 1.8% in 2026, with inflation expected to decline gradually to 2.1% by 2027. The median forecast for the federal funds rate has been lowered slightly compared to June, projecting rates of 3.6% by year-end 2025, 3.4% in 2026, and 3.1% in 2027.
Rationale for Rate Cut and Policy Outlook
- The Fed’s dual mandate of maximum employment and stable prices requires balancing competing risks. The recent rise in downside risks to employment, alongside persistent inflation, prompted the committee to move toward a more neutral policy stance by cutting rates.
- The rate cut is seen as a risk-management step, acknowledging the labor market’s cooling without abandoning the commitment to bring inflation back to 2% sustainably.
- The Fed will continue to reduce its securities holdings (balance sheet runoff) but at a modest pace, which is not currently expected to have significant macroeconomic effects.
- Policy decisions remain data-dependent, with no preset course, reflecting the unusual economic environment where labor market weakness and inflation risks coexist.
Key Issues Discussed in Q&A
- Fed Independence: Powell emphasized the Fed’s strong culture of independence and data-driven decision-making, dismissing concerns about political influence despite the presence of a Fed governor with White House ties.
- Impact of Tariffs: Tariffs have contributed modestly to goods inflation but have had a limited pass-through to consumer prices so far. Tariffs may also be affecting the labor market indirectly, but immigration and labor supply changes are more significant factors in employment trends.
- Labor Market Dynamics: The slowdown in job creation is partly due to lower immigration and labor force participation, creating a “curious balance” where both labor supply and demand have declined sharply.
- Inflation Outlook: While inflation remains above target, the risks of persistent inflation have lessened somewhat due to the slowing labor market and moderated GDP growth.
- Rate Cut Magnitude: There was no broad support for a larger (50 basis point) cut; the quarter-point cut reflects a measured adjustment toward neutrality rather than a rapid policy shift.
- Housing Market: Higher rates have burdened the housing sector, but the Fed’s monetary policy aims to support a strong economy that ultimately benefits housing. Structural housing shortages remain a key issue beyond monetary policy’s reach.
- Financial Stability and Consumer Health: Despite some increases in delinquencies and credit score declines, overall household and bank financial health remain solid. The Fed monitors financial stability carefully but focuses monetary policy on its dual mandate.
- Uncertainty and Forecasting: Powell acknowledged the difficulty and uncertainty in forecasting under current conditions, emphasizing humility among forecasters and the need for ongoing data assessment.
- AI and Labor Market: AI may be influencing labor demand, especially for younger workers, but it is not the primary driver of current labor market trends.
- Public Confidence: Powell acknowledged that public confidence in the Fed has declined relative to the president but reaffirmed the Fed’s commitment to its mission and data-driven policy.
Summary
The Fed’s quarter-point rate cut reflects a nuanced response to an economy facing a cooling labor market and persistent inflation. The decision marks a shift toward a more neutral stance, balancing the Fed’s dual mandate amid unusual economic conditions. The Fed remains committed
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