As widely expected, the US Federal Reserve (Fed) trimmed its policy rate by 25 basis points to a new range of 4-4.25% on September 17, acknowledging a softening labour market even as inflation perked up in recent months in the United States.

It’s the first rate cut of President Donald Trump’s second term, following a nine-month pause prompted by the uncertainty surrounding the administration’s major policy shifts.

Policymakers cited slowing job growth, cooling inflation, and softer consumer spending as key factors. Inflation has eased toward the Fed’s 2% target, giving room to support growth without reigniting price pressures.

However, the US economy’s path forward looks murky, according to Fed Chair Jerome Powell.

Still, the Fed moved forward with a “risk management cut,” as Powell characterised it, because central bankers can’t wait around forever for the effects of Trump’s policies to become crystal clear.

“We have to live life looking through the windshield rather than the rearview mirror,” CNN quoted Powell and said.

In the second half of 2024, the central bank had reduced its policy rate by 100 basis points as inflation had receded from its post-Covid high, then kept it unchanged for eight months as inflation stayed sticky.

Once the Trump administration imposed broad tariffs on most foreign goods, uncertainty about their ultimate effects on inflation increased.

Inflation of goods exposed to tariffs, such as furniture and appliances, have begun to climb in recent months, according to economic data.

The Fed chair said the impact of tariffs on prices has not had a “very large effect at this point”, but that the full extent of those effects remains to be seen.

But in the end, it was the labour market’s future that was top of mind for Fed officials.

In assessing the economy, the Fed said: “Recent indicators suggest that growth of economic activity moderated in the first half of the year. Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.”

Fed officials pencilled in an additional rate cut later in the year, according to their updated economic projections, compared to the two cuts in 2025 they estimated in June.

That would mean the Fed could deliver another quarter-point cut at its October meeting, then another in December.

“However, their projections for unemployment and inflation this year were unchanged compared to their June estimates,” CNN noted.

Powell made it clear that growing risks to the labour market were a key reason why the Fed finally lowered rates, even though there’s also a risk of Trump’s tariffs pushing up prices.

The Fed chief characterised the labour market as one of “low hiring and low firing”.

He pointed to high unemployment among young people as a consequence of today’s low hiring environment. The Fed noted in its policy statement that “downside risks to employment have risen”.

“The concern is that if you start to see layoffs, there won’t be a lot of hiring going on,” Powell said.

America’s central bankers remain in a tough spot, with both sides of their dual mandate — stable prices and maximum employment — under threat.

Analysts say it’s very likely the Federal Reserve will take into account the weaker jobs-creation and labour‐market data in its upcoming decisions.

When the labour market weakens, that obviously reduces pressure on inflation. This is because wage and price pressures are likely to ease if demand for workers falls.

Analysts see this as a clear signal that economic growth is cooling — both are relevant for deciding whether to ease monetary policy – either to cut interest rates or keep policy tighter!

Going forward, the Fed vowed to pursue a “data-dependent” approach, signalling that future moves will hinge on inflation and labour market trends and not a preset path of cuts.