The rate cut shows that the Fed is starting to prioritize preventing the weakening of the labor market rather than holding back inflation. At the same time, the Fed also signaled that it will continue to cut cuts at its meetings in October and December.
The decision to lower interest rates by 0.25 percentage points to 4.00% - 4.25% is considered a step to closely follow the increased unemployment risk. The US is currently seeing an increase in the unemployment rate for people of color, a shortened working week and a significant decrease in recruitment rates.
Fed Chairman Jerome Powell admitted: We must both keep an eye on inflation and not ignore the labor-use target. The signal shows that the job market is weakening and we do not want it to get worse any more.
Although inflation is expected to end the year at 3% - much higher than the Fed's 2% target, policymakers believe that the risk of a new decline in employment is an urgent challenge. Therefore, the upcoming direction is likely to be policy easing, despite the risk of inflation remaining high until 2026.
Notably, this decision is partly in line with President Donald Trump's wishes - who has long pushed the Fed to cut interest rates more strongly. However, the decrease has not met the "shocking" expectations that Mr. Trump has repeatedly publicly demanded.
The newly released economic forecast shows that the Fed maintains the unemployment outlook at 4.5%, GDP growth at 1.6%, while inflation remains at 3%. Investors are now betting on a more than 90% chance that the Fed will cut interest rates again at its meeting in late October.
The market reaction after the decision was still differentiated: US stocks initially increased and reversed, the USD increased slightly, bond yields did not fluctuate much.
With Mr. Powell emphasizing that the Fed will act "every meeting", observers said that US monetary policy is entering the most unpredictable period in many years - both controlling inflation and racing to keep jobs.
