• Further rate cuts by Fed 'likely' if GDP growth continues to slow, while central bank 'sacrificing' higher prices for higher employment

ISTANBUL 

The US Federal Reserve’s decision to cut the federal funds rate by 25 basis points to the range of 4% to 4.25% could mark a pivotal shift in US monetary policy, as the central bankers attempt to navigate the delicate balance between supporting a slowing job market and containing current inflation pressures.

Fed Chair Jerome Powell, on the other hand, said in his post-meeting press conference that the decision was a "risk-management cut," implying that it was an insurance policy against a further slowing the job market.

Powell and the Fed mentioned that the downside risks to employment appear to have risen, in contrast to the downside risks to price stability.

Lower borrowing costs might help households and businesses, but it's unclear if this will support job growth or run the risk of reviving price increases and ushering in a new era of American economic growth.

Weakening labor market

The decision came after the weak employment data in the previous weeks. Maximum employment and stable prices are the dual mandate that the Fed watches out for when determining the monetary policy.

The number of open jobs in the US (JOLTS) fell to 7.18 million in July, the lowest level since September 2024 and below expectations, while private sector employment in the country increased by a lower-than-expected 54,000 jobs in August.

Non-farm employment in the US increased by 22,000 jobs in August, falling short of expectations. The unemployment rate, which rose from 4.2% to 4.3%, also reached its highest level since October 2021.

The number of people filing for unemployment benefits for the first time in the country also rose by 27,000 to 263,000 in the week ending Sept. 6, reaching its highest level since October 2021.

Meanwhile, last week, the Bureau of Labor Statistics revised its employment statistics, finding that 911,000 fewer nonfarm jobs were created in the 12 months ending in March 2025 than initially reported.

Max Gillman, a professor of economic history at the University of Missouri, told Anadolu that he believes the Fed’s decision to cut the policy rate will ease the pressure on the labor market to some extent.

“This interest rate cut will not reverse all of those trends but will begin to chip into the problem of interest rates being, arguably, too high relative to the inflation rate. As a result, the real interest rate, after accounting for inflation, has been too high for too long,” Gillman said.

He noted that the rate cut reduces the after-inflation interest rate, helping businesses to borrow from banks.

“The real estate market, including both residential housing and commercial real estate, will find some modest relief, especially given the market’s current expectation of at least one more interest rate cut this year,” Gillman said.

He said the decision will benefit the construction industry's labor market, which has been struggling, as well as increase consumer spending and contribute to overall economic growth, with the hope of avoiding a recession.

According to Jeffrey Frankel, an economics professor at Harvard University, while this is a minor change, it should help to slightly increase worker demand, all other things being equal.

Inflation front

On the inflation front, the US Producer Price Index (PPI) fell by 0.1% in August, marking the first monthly decline since April. The PPI rose 2.6% year-on-year, falling short of expectations.

The Consumer Price Index (CPI) rose 0.4% month-on-month in August, exceeding expectations, and rose 2.9% year-on-year, in line with expectations. Annual inflation reached its highest level since January during this period.

Gillman said he is "quite convinced" that the interest rate cut will not increase inflation and will benefit the economy modestly, adding that more rate cuts are required.

He noted that the large banks currently hold $3.3 trillion USD in Fed reserves, which will continue to make the future of inflation uncertain.

“This reserve bundle can enter circulation and cause inflation at any time. The new post-2008 Fed policy of paying interest on reserves means that there exists zero regulation of when these reserves might be lent out by the large banks, enter circulation, increase the money supply in circulation, and cause higher inflation,” Gillman noted.

He underlined that the problem with inflation is not the interest rate being too high now, but the looming reserves held at the Fed that increase the future expected inflation rate, as seen, for example, in record-high gold prices.

Frankel believed that the rate cut should put a bit of upward inflation pressure, other things being equal.

Further rate cuts

On the prospect of the possibility of future rate cuts, Frankel said further rate cuts are likely if gross domestic product (GDP) growth and employment continue to falter, as is fairly likely.

“But a sharp increase in inflation could reverse the trend,” Frankel said.

He added that we could say, in a way, “The Fed is sacrificing higher prices for higher employment.”

Gillman said the Fed will reduce rates at least once more this year.

“Of course, it depends on inflation not rising much above its current 2.9%. The Fed still has room at its now 4.15% interest rate (interest paid on reserves) to lower it a full percentage point down to 3.0%,” he noted.

Given the inflation rate holding, he would expect a series of interest rate cuts, going down at least to 3.5%, he added.

The Fed, in its median projections, projected two more rate cuts this year, while forecasting only one in 2026, below market expectations.