The first interest rate cut by the Federal Reserve in 2025: a deep interpretation of interest rate adjustments

On September 17th, the Federal Reserve announced a 25 basis point reduction in its benchmark interest rate, marking the first rate cut since 2025 and lowering the target range for the federal funds rate from 4.25% -4.50% to 4.00% -4.25%. This decision may seem like a technical adjustment of monetary policy, but it actually reflects the policy differences within the Federal Reserve, the uncertainty of the economic outlook, and the increasingly complex political pressures, which are worth further analysis.

The policy shift behind economic data

The decision to cut interest rates this time is based on the recent significant cooling of the job market. The revised data shows that from June to August this year, the average monthly job creation in the United States was only 29000, far below the previous market expectation of 150000. More noteworthy is that the Ministry of Labor has lowered the number of new jobs added in the past year by 911000 as of March 2025, which completely changes the market's perception of the strength of the job market.

Meanwhile, the inflation situation remains complex. The US Consumer Price Index rose 2.9% year-on-year in August, reaching its highest level this year and continuing to exceed the Federal Reserve's policy target of 2%. The situation where the job market is slowing down and inflationary pressures coexist has put the Federal Reserve's dual goals of pursuing "price stability" and "full employment" in conflict, forcing policymakers to make difficult trade-offs between the two.

Internal disagreements and future policy paths

Although interest rate cuts are a foregone conclusion, there are significant differences within the Federal Reserve regarding the future policy path. The latest released interest rate chart shows that decision-makers have different views on the direction of interest rates before the end of the year. Among the 19 decision-makers, 9 support another rate cut, 10 support two more rate cuts, and one does not support any further rate cuts. This divergence reflects the uncertainty in judging the economic outlook.

Newly appointed council member Stephen Milan became the only opponent at this meeting, advocating that the rate cut should be expanded to 50 basis points. The dot plot also shows an official predicting another 5 interest rate cuts before the end of the year, each by 25 basis points. Looking ahead to a longer-term policy direction, officials expect only one interest rate cut in 2026 and another in 2027, gradually approaching the long-term neutral interest rate level of 3%.

Political pressure and challenges to central bank independence

The Federal Reserve's interest rate meeting was described by The Wall Street Journal as "the most peculiar in recent years," not only due to the complex economic situation, but also because of unprecedented political pressure. US President Trump has repeatedly publicly demanded a reduction in interest rates to 1% and has criticized Chairman Powell on social media for "strangling the economy". A few days before the meeting, he spoke out again to pressure: "It's too late to cut interest rates! We must immediately cut interest rates even more significantly, and the real estate market will take off as a result

Political intervention does not only remain at the level of rhetoric. Trump pushed for White House Economic Committee Chairman Stephen Milan to enter the Federal Reserve Board of Governors and attempted to dismiss Lisa Cook, a director appointed by Biden. Although an appeals court ultimately ruled to allow Cook to continue his duties and attend the meeting, Milan still made his first appearance as a member of the Federal Reserve Board. These personnel disputes may not change the path of interest rates in the short term, but if the president successfully replaces a Federal Reserve board member whose term ends in 2038, it will have a profound impact on the Fed's future policies.

Market Impact and Future Prospects

Although the interest rate cut has been confirmed, what the market really cares about is the future policy signal of the Federal Reserve. Powell signaled last month that he will place greater emphasis on employment rather than inflation. The market is closely monitoring whether he will further release dovish signals of easing at the press conference. At the same time, the latest economic forecasts released by the Federal Reserve, including the outlook for future interest rates, inflation, and unemployment rates, will affect the market's judgment on whether there will still be interest rate cuts during the year and the number of cuts.

Almost all analysts believe that this interest rate cut is just the beginning. The real focus is on how Powell can find a balance between slowing employment and inflationary pressures, and how he can maintain the independence of the Federal Reserve under political pressure. As global economic growth slows down and geopolitical risks rise, the decisions of the Federal Reserve will not only affect the US economy, but also have a profound impact on global financial markets.

From historical experience, it is crucial for the Federal Reserve to maintain policy independence under political pressure. Overcatering to political demand may lead to runaway inflation or asset foam, while being too rigid may exacerbate the risk of economic downturn. In the current complex internal and external environment, the Federal Reserve needs to carefully balance various factors to ensure that monetary policy can effectively support sustainable economic development.

In the coming quarters, the market will closely monitor changes in economic data and corresponding policy adjustments by the Federal Reserve. The further performance of the job market, the sustainability of inflation trends, and the outlook for global economic growth will all be key factors affecting the decisions of the Federal Reserve. In this period of uncertainty, policy communication and forward guidance from the Federal Reserve are particularly important, as they will help the market better understand policy direction and reduce unnecessary market volatility.

Overall, the Fed's interest rate cut this time is not only a simple policy adjustment, but also a difficult decision to deal with the complex economic situation and political environment. With the continuous existence of internal and external pressures, the future decision-making path of the Federal Reserve will be full of challenges, and policy makers will also need to demonstrate higher wisdom and courage.