On September 17, 2025, the Federal Reserve’s Federal Open Market Committee (FOMC) lowered the target range for the benchmark federal funds rate by one-quarter percentage point — the first rate cut in nine months. This brought the range to 4.0%–4.25% and resumed the process of lowering it from a high of 5.25%–5.5%, where it stood from July 2023 to September 2024.¹

The Committee also released economic projections that suggested the possibility of two more quarter-percentage-point reductions by the end of the year.²

Jobs vs. prices

As the nation’s central bank, the Federal Reserve operates under a dual mandate to promote price stability and maximum sustainable employment for the benefit of the American people. This is a balancing act, because an economy without inflation is typically stagnant with a weak employment climate, while a booming economy with plenty of jobs is susceptible to high inflation. The current situation is even more challenging, because employment is slowing while inflation is rising — a combination that could potentially evolve into a stagnant inflationary economy or stagflation.

The FOMC typically raises rates to combat inflation and lowers rates to stimulate employment. But what should the Committee do when both measures are moving in the wrong direction?

As Fed Chair Jerome Powell pointed out following the recent rate decision, this is an unusual situation with no risk-free path forward. However, risks to the employment side have increased, moving the risks of employment and inflation closer to balance. Thus, the Committee decided to take an incremental step toward lowering the benchmark rate from what has been a restrictive level aimed at battling inflation toward a more neutral level that neither slows nor stimulates the economy. The Fed’s long-term projections suggest that a neutral rate would be around 3%, so the current funds rate should continue to suppress inflation to some degree.³

The employment picture

Until recently, available data suggested that the job market remained strong. However, the July employment report included more accurate, revised data showing that 258,000 fewer jobs were added in May and June than previously thought. Preliminary data for July and August also indicated low job creation at an average of just 27,000 jobs per month for the last four months. This compares with a monthly average of 123,000 jobs added during the first four months of the year.⁴

Despite fewer jobs, the unemployment rate, which measures the percentage of the unemployed labor force who have looked for work in the last four weeks, has remained low at 4.3% in August.⁵ This reflects slower growth in the potential workforce and a lower labor force participation rate. The simultaneous slowdown in supply (fewer available workers) and demand (fewer available jobs) is unusual and could affect economic production.⁶

Unemployment is significantly higher for young people and minorities, and the portion of unemployed who have been out of work for more than six months is the highest in over three years. Wage growth has slowed but remains above the level of inflation.⁷

The inflation picture

The FOMC has established a 2% annual inflation target based on the personal consumption expenditures (PCE) price index, which represents a broad range of spending on goods and services, and tends to run below the more widely publicized consumer price index. PCE inflation was near the Fed’s target at 2.2% in April 2025 but has been rising since then and was 2.7% in August. Core PCE, which strips out volatile food and energy prices, has also risen since April and was 2.9% in August.⁸

Although these recent increases are moderate, there are concerns that inflation will continue to rise as the effects of tariffs on foreign goods become more entrenched in the economy. Powell stated that the Fed’s current “base case” is that the inflationary effects of the tariffs may be a one-time increase rather than a more dangerous inflationary spiral. But he cautioned that the effects could be more persistent and emphasized that the FOMC’s obligation is to ensure that doesn’t happen.⁹

Effect on other rates

The federal funds rate is the rate at which banks make overnight loans to each other within the Federal Reserve system and serves as the base for other short-term rates such as those on short-term bonds, money market accounts, and certificates of deposit. It also serves as the benchmark for the prime rate — the rate at which commercial banks loan to their best customers — which typically runs 3% above the federal funds rate. This in turn affects consumer loans such as auto loans, credit cards, home-equity lines of credit, and adjustable-rate mortgages. Rates on longer-term bonds and fixed-rate mortgages may be affected indirectly by changes to the federal funds rate, but they typically reflect broader economic trends rather than the specific funds rate.

A quarter-percentage drop is a small step, but if the Fed continues to lower the funds rate it will gradually change the interest-rate environment. Lower rates may benefit borrowers, but savers might lose interest income. Of course, many people are in both positions.

While the macroeconomic picture shows signs of a weaker employment situation with the potential for higher inflation, neither of these appear to be at a critical level yet, and the Fed will continue to monitor economic conditions and adjust monetary policy accordingly. You may want to keep an eye on further economic data and developments.

Projections are based on current conditions, subject to change, and may not come to pass. The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. The FDIC insures CDs and bank savings accounts, which generally provide a fixed rate of return, up to $250,000 per depositor, per insured institution.