Powell: "Labor Market Clearly Slowing" as Fed Resumes Rate Cuts... One or Two More Cuts This Year?

Fed Lowers Benchmark Rate to 4.0-4.25% Annually
Powell: "Difficult to Say Labor Market Remains Very Robust"
Stresses "Rate Cut for Risk Management"... Wide Divergence Among Committee Members
Number of Additional Cuts This Year Remains Uncertain

On September 18 (local time), Jerome Powell, Chair of the US Federal Reserve (Fed), announced the first interest rate cut of the year, stating, "The labor market is truly cooling." He assessed that the impact of tariff-driven inflation has been more limited than initially expected, making it clear that the background of this rate cut is the slowdown in employment. The Fed also projected two additional rate cuts within the year.

However, Chair Powell noted that this rate cut was a "risk management" decision and that there was no broad support for a "big cut" (a 0.5 percentage point rate reduction). With committee members sharply divided over the number of additional cuts this year, there is still uncertainty as to whether the Fed will embark on a full-scale monetary easing cycle with consecutive rate cuts.

At the press conference held immediately after the Federal Open Market Committee (FOMC) regular meeting, Powell stated, "Labor demand has weakened, and the recent pace of job creation appears to be insufficient to keep the unemployment rate steady," adding, "It is now difficult to say the labor market remains very robust."

He explained, "The unemployment rate remains low but has edged up, and job growth has slowed," diagnosing that "the downside risk to employment has increased." He further added that both labor supply and demand are rapidly slowing.

Powell emphasized that the cooling of the labor market had a significant impact on this decision. He said, "The risks of inflation have become smaller than expected due to the slowdown in employment and growth rates," stressing that "the downside risk to employment is now greater."

He assessed that tariff-driven price increases were more limited than anticipated. "Inflation has risen and remains somewhat elevated," he said, "but the tariff burden has been mainly absorbed by importers, and the pass-through to consumer prices has been limited." He further explained, "The impact passed on to consumers was very small, and both the speed and extent of the pass-through were slower and smaller than we had thought." However, he added that if companies accelerate the pace of passing on costs, there remains a possibility of future price increases.

Powell also described this rate cut as "in some respects, a risk management cut," explaining it as a preemptive and precautionary measure. He added, "There is no risk-free path right now, and it is not clear what we should do." Accordingly, analysts say it is difficult to conclude that the Fed will proceed with consecutive rate cuts. Powell also noted, "There was no broad support for a 50 basis point (1bp = 0.01 percentage point) cut."

The Fed announced that it had decided to lower the federal funds rate by 0.25 percentage points to an annual range of 4.0-4.25%. This is the first cut in nine months, following a rate reduction in December last year and a subsequent period of holding rates steady. The recent clear signs of slowing employment indicators paved the way for this cut. In its policy statement, the Fed described economic activity as having moderated and newly added the phrase "job growth has slowed."

Of the 12 FOMC members with voting rights, 11 supported the 0.25 percentage point cut. Only Stephen Myron, the newly joined "Trump economic advisor," voted against, advocating for a 0.5 percentage point cut. Michelle Bowman, Vice Chair, and Christopher Waller, who had opposed holding rates steady at the July meeting, agreed with the majority this time.

Regarding the rate outlook, the Fed indicated the possibility of two additional cuts this year. This suggests that at the remaining meetings in October and December, there could be 0.25 percentage point cuts each. This is one more cut than the two projected in the June dot plot.

However, there were significant differences among the committee members. Of the 19 total FOMC members, 7 believed no further cuts were needed this year. Two supported one more cut (0.25 percentage points) within the year, and 9 supported two additional cuts (0.5 percentage points). One member, presumed to be Myron, advocated for a total of 1.25 percentage points of additional cuts this year. With such divided opinions, discussions over the future rate path are expected to be intense.

According to the dot plot, a single 0.25 percentage point cut is also expected in both 2026 and 2027.

In the Summary of Economic Projections (SEP) released alongside this decision, the Fed raised its forecast for this year’s gross domestic product (GDP) growth rate from 1.4% to 1.6%. The year-end unemployment rate forecast was maintained at 4.5%, and the inflation rate, based on core personal consumption expenditures (PCE), was kept at 3.1%.