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The US Federal Reserve has cut its key interest rate by 0.25 points and projected it would do so twice more this year as concern grows at the central bank about the health of the nation’s labour market.
The move is the Fed’s first cut since December and it lowered its short-term rate to about 4.1 per cent, down from 4.3 per cent.
Fed officials, led by chair Jerome Powell, had kept their rate unchanged this year as they evaluated the impact of tariffs, tighter immigration enforcement, and other Trump administration policies on inflation and the economy.
Yet the central bank’s focus has shifted quickly from inflation, which remains modestly above its 2 per cent target, to jobs, as hiring has grounded nearly to a halt in recent months and the unemployment rate has ticked higher.
Lower interest rates could reduce borrowing costs for mortgages, car loans, and business loans, and boost growth and hiring.
“In this less dynamic and somewhat softer labour market, the downside risks to employment appear to have risen,” Powell said at a press conference following the Fed’s two-day meeting.
Officials of the central bank also signalled that they expect to reduce their key rate twice more this year, but just once next year. Before the meeting, investors on Wall Street had projected five cuts for the rest of this year and next.
The Fed is facing both a challenging economic environment and threats to its traditional independence from day-to-day politics.
At the same time that hiring has weakened, inflation remains stubbornly elevated. It rose 2.9 per cent in August from a year ago, according to the consumer price index, up from 2.7 per cent in July and noticeably above the Fed’s 2 per cent target.
It’s unusual to have weaker hiring and elevated inflation, because typically a slowing economy causes consumers to pull back on spending, cooling price hikes. Powell suggested last month that sluggish growth could keep inflation in check even if tariffs lift prices further.