Maneuvering between a rock, a hard place, and a president pushing for unprecedented influence over monetary policy, the nation’s central bank moved to lower interest rates for the first time this year. On Wednesday, the Federal Reserve cut its benchmark rate by a quarter point and projected two more cuts this year.
The move – which puts the target range for its main lending rate at 4% to 4.25% – signals that the Fed is prioritizing the propping up of a slowing economy over its fight to keep inflation low. The Fed’s aim is to perk up the economy by making it cheaper to borrow money.
But the reality? Don’t expect fireworks.
Why We Wrote This
The Federal Reserve’s mission, given by Congress, is to spur job growth while keeping inflation under control. Its objectives have grown trickier this year amid political pressure from the White House, a slowing job market, and still-high inflation.
A Fed cut “does not produce an immediate miracle,” says Brett House, an economics professor at Columbia Business School. “Changes in monetary policy take somewhere between a year to two years to fully work their way through the economy,” he adds, with most of the effect happening in the first year.
Even in normal times, it takes a while for rate cuts to work their way through the economy, as many consumers and businesses don’t benefit immediately from the lower rate. And even then, the effect is iffy. The Fed only controls short-term loans. Markets determine the rates for the longer-term loans that businesses and consumers often take out.
But these are not normal times. Even without the highly dramatic and public pressure from the president, the central bank faces an unusual combination of factors. The economy is slowing while interest rates are rising. Left unchecked, that combination could lead to a period – reminiscent of the early 1970s – of high inflation and economic stagnation, or stagflation.
The current levels of unemployment and inflation are far lower than in the 1970s – “stagflation-esque” rather than true stagflation, says Mark Zandi, chief economist of Moody’s Analytics. But the direction of the trends is worrying.
Adding to the Fed’s difficulties is a dramatic and highly public conflict with the White House. The central bank, which had been lowering rates under the previous administration, hit the pause button in January after three consecutive cuts since September 2024. Fed Chair Jerome Powell said he wanted to assess the inflationary impact of Mr. Trump’s controversial tariffs before further lowering rates.
Frustrated, the president began publicly berating Mr. Powell, his own appointee, for not cutting interest rates fast enough. As Mr. Powell ignored the attacks, the president moved to replace Fed board members with his own appointees.
On Tuesday, Trump’s economic adviser Stephen Miran was sworn in as a new governor, on leave from his White House post as chair of the Council of Economic Advisers. Mr. Miran is completing four months left on a term for a governor who resigned last month. His appointment is the third for Mr. Trump on the 12-member rate-setting committee.
The President has meanwhile pushed to oust a fourth member, Lisa Cook, with his administration alleging possible mortgage fraud. Ms. Cook has denied the charges. An appeals court has ruled she can continue her role as a Fed governor because the administration’s charges alone don’t give Mr. Trump the authority to oust her.
The latest Fed cut is unlikely to do much to boost the economy quickly. The most immediate effect is on bond markets, which often adjust even before a cut is announced. The market has been anticipating a quarter-point cut for September for some time.
