US Federal Reserve Cuts Key Interest Rate to 4.00-4.25%, Future Path Uncertain Amidst Divided Views

The Federal Reserve has once again lowered its benchmark interest rate, bringing it to a range of 4.00% to 4.25% following its mid-September meeting. This quarter-point reduction, largely anticipated due to signs of a weakening job market, marks a significant move after the central bank had held rates steady for most of the year, following aggressive cuts in late 2024.

While the rate cut itself saw broad consensus among voting members, the path forward remains contentious within the Federal Open Market Committee (FOMC). The latest “dot plot” projections reveal a divided committee: 10 of 19 members foresee at least two more quarter-point cuts this year, while seven predict no further reductions, and two anticipate only one. This divergence underscores significant uncertainty regarding the pace and extent of future monetary policy adjustments.

Fed Chair Jerome Powell acknowledged the shifting balance of risks, noting that while economic growth forecasts were slightly stronger, job creation has stalled. He emphasized that decisions are rooted in economic data, not political influence, despite unprecedented pressure from President Donald Trump for more rapid rate reductions. Concerns about the Fed’s independence are mounting as the president continues to publicly push for lower rates, potentially impacting long-term bond investor confidence.

The central bank’s dual mandate of maximum employment and price stability guides its actions. With inflation stubbornly above the 2% target, the current cuts aim to support employment without jeopardizing price stability. However, the exact “neutral” rate—one that neither stimulates nor restrains the economy—remains elusive and a subject of ongoing debate, further complicating the Fed’s forward guidance. The median projection among FOMC members places the federal funds rate between 3% and 4% over the next three years, though these forecasts are inherently subject to economic changes.

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