After holding interest rates steady for five consecutive meetings, voting members of the Federal Reserve’s rate-setting committee elected to lower its benchmark rate by a quarter-point on Wednesday, dropping the overnight lending rate for banks to a target range of 4% to 4.25%.

“There are no risk-free paths now,” said Federal Reserve Chairman Jerome Powell, addressing a roomful of reporters at a press conference concluding the Federal Open Market Committee’s two-day monetary policy meeting.

Stephen Miran cast the lone dissenting vote, preferring a larger 0.5% rate cut. Miran, a nominee of President Donald Trump, rushed through Senate confirmation Monday to fill a temporary voting seat on the Fed’s Board of Governors in a highly partisan 48-47 vote.

The Summary of Economic Projections (SEP) or “dot plot” released concurrently with the September rate decision showed a majority of meeting participants projecting two additional rate cuts as a possibility in 2025, though just one in 2026.

Powell suggested that markets — and the reporters in attendance — regard the SEP through a lens of probability rather than certainty. Indeed, the near unanimity of members for a 25-basis-point cut today belied a wide dispersion of what may happen next.

“A risk management cut,” he described today’s decision. “No really knows where the economy will be in three years,” he continued, but the “nature of the exercise” presents a snapshot of a sustainable path for getting there. A diversity of views in the SEP should be unsurprising, given the “historically unusual” predicament facing policymakers, he said.

‘A curious balance’

The task of monetary policymakers when the Fed’s dual mandate of stable prices and maximum employment are in tension, Powell explained, is gauging which mandate is further from a target baseline in relation to how long it might take to return both to equilibrium.

“We have to live life looking through the windshield and not the rear-view mirror,” he said, noting markets work through expectations. “The rate cut is part of a broader rate path.”

“A curious balance” is how Powell described a labor market with job creation running below the “breakeven” point needed to keep the unemployment rate near a sustainable long-run rate of roughly 4%. Labor supply “has come way down,” he noted, at the same time “demand for workers has come down quite sharply.”

“If you said between 0 and 50,000, you’d be right,” quipped Powell when asked by a reporter what the breakeven point for job creation might be, as it varies depending on labor force participation rates and the supply of workers available.

Powell attributed much of the decline in job creation to immigration policy restricting the flow of new workers, amplified by lower labor force participation. When asked about labor impacts from artificial intelligence, he noted “some effects … a factor, but hard to say how big it is.”

Powell held firm on previous Fed decisions to wait to cut until this meeting, despite significant revisions to the labor market resilience narrative which motivated the Fed to maintain a more restrictive policy stance. The Fed is not in the midst of any recalibration of monetary policy, he said, but rather a meeting-to-meeting journey on the path to neutral rates.

He noted weakening employment conditions for marginal workers and communities “most susceptible to economic cycles,” citing recent college graduates, younger workers and minorities. The decline in labor demand means that any uptick in unemployment is likely to disproportionately fuel higher rates of long-term unemployment, a metric on the rise.

Long-run inflation

Nick Timiraos, chief economics correspondent for The Wall Street Journal, asked whether economic conditions warranted keeping a restrictive policy setting at all, and what economic conditions might have been necessary for 50 basis points of easing to occur.

“There wasn’t widespread support at all for a 50 basis point cut today,” Powell responded, noting that risks tied to both sides of the mandate preclude dramatic shifts in policy. Acknowledging variability in the “neutral rate” at which monetary policy is neither restrictive nor loose, he said lowering the federal funds rate by 25 basis points moved monetary policy “meaningfully” toward equality between achieving the Fed’s duel mandate.

The personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge, rose 2.7% for the 12 months ending in August, Powell noted, with core PCE that excluded volatile food and energy prices rising 2.9%. He attributed the rise to goods inflation around 1.2% that he estimates has added around 0.3% or 0.4% to core PCE.

Beyond the next year or so, most measures of long-run inflation should return to 2%, Powell believes, citing Fed projections of 2.1% inflation in 2027 and 2% inflation in 2028. Powell continues to believe tariffs will produce a one-time price increase, though the pace at which tariffs have impacted consumer prices has been “slower and lower” than expected.

Powell has seen tariffs mostly being paid by companies sitting between exporters and consumers, without price hikes having largely reached the consumer. He warned, though, the supply chain has every intention of passing the cost through to end consumers in time.

Reporter questions about Fed independence swirled through the entire press conference, particularly concerning how markets and the public can tell if the Fed is acting independently or not.

“It’s deeply in our culture to do our work based on the incoming data,” Powell said. “We’re doing our work exactly as we always have.”

Powell said the Fed assumes that moderate long-term interest rates result from achieving its dual mandate of stable prices and maximum employment. He said there are no plans to alter Fed operations to include maintaining long-term interest rates as a so-called “third mandate,” as has been floated by Miran.