Fed moves to protect weakening job market with bold rate cut

The Federal Reserve announced Wednesday it is slashing interest rates by half a percentage point and projected two more cuts before the end of the year, in a clear sign that officials believe they are winning the battle against inflation.

The move — which is twice as large as a standard rate cut — also indicates that the central bank is growing nervous about the weakening labor market. While layoffs remain low, job opportunities have dwindled, helping to gradually push up unemployment.

The central bank’s decision to act more boldly is an effort to prevent a further rise in joblessness, a key fight that will determine what kind of economy the next president inherits. And Fed officials offered more good news on that front: They projected four rate cuts next year and two more the year after, with inflation returning to the central bank's 2 percent target by the end of 2025.

“The U.S. economy is in good shape,” Fed Chair Jerome Powell said at a press conference after the decision. “Inflation is coming down. The labor market is in a strong place. We want to keep it there.”

The rate decision — the first time the Fed has cut borrowing costs in four years — marks a turning point for the economy that brings the U.S. closer to achieving a so-called soft landing, where economic activity slows enough to bring down inflation without falling into recession. That seemed an unlikely outcome to many economists when inflation was at its peak in mid-2022 and the Fed was rapidly jacking up borrowing costs.

The news that rates are on their way down and that the Fed is acting with some urgency is likely to help drive down mortgage rates, offering relief to companies, debt-burdened households and prospective home buyers. Reduced borrowing costs also could provide some lift to consumers' outlook, in a boost to Vice President Kamala Harris, though voters' lackluster views of the economy are unlikely to change only weeks out from the election.

Former President Donald Trump has suggested for much of the year that the Fed would cut rates to help Democrats, though at this point — with inflation fading and the job market showing signs of strain, a cut became inevitable. That's a point he seemed to acknowledge this week.

On Tuesday night, Trump told rallygoers in Flint, Michigan, that a rate cut and “all the political stuff” was imminent. Still, he said whether Powell lowered rates by a quarter or half a percentage point — a subject of much debate in the leadup to the decision among financial pundits — the reason for the reduction is “the economy’s not good, otherwise you wouldn’t be able to do it.”

At his press conference, Powell reiterated that the central bank only takes economic considerations into account, not political ones. He also obliquely hinted that, if Fed officials were interested in juicing the economy to influence the election, they would have acted much earlier.

“The things that we do really affect economic conditions for the most part with a lag,” he said.

That the Fed is cutting rates when unemployment is still relatively low is in and of itself a victory for the country. But officials expect they will have to lower rates much more before borrowing costs are no longer biting into growth, meaning that recession is still possible.

But Wednesday's larger move makes a more significant decline in the job market less likely.

“We do not seek or welcome further cooling in labor market conditions,” Powell said in a widely watched speech in Jackson Hole, Wyoming, last month.

Fed officials projected that the unemployment rate would stand at 4.4 percent by the end of the year, up from 4.2 percent currently.

On Wednesday, the Fed chief argued that the central bank is not too late to save the labor market from further trouble, though he signaled that policymakers perhaps wished they had cut in July, after a jobs report later the same week showed a jump in the unemployment rate. That helps explain the decision to do a larger cut in September.

“If we had gotten the July report before the meeting, would we have cut?” he said. “We might well have.”

Sam Sutton contributed to this report.