Fed Cuts Interest Rates: Decision shows Shift in Focus on Consideration of Economic Conditions

Editorial

15:30 JST, September 19, 2025

The U.S. Federal Reserve Board has implemented its first interest rate cut since President Donald Trump’s return to office. Amid persistent inflationary pressure, a slowdown in employment has become evident, heightening uncertainty.

What impact will Trump’s tariff policy have on prices and the economy? It is hoped that the Fed will carefully examine these issues as it manages its monetary policy.

The Fed has decided to cut its policy rate by 0.25 percentage points to a range of 4%-4.25% per year. This marks the first rate cut in six meetings since December last year. The central bank projected two additional rate cuts within the year.

This policy decision was made under unprecedented political pressure, including repeated demands for rate cuts from Trump, who has also moved to dismiss a member of the Fed Board of Governors. Some in financial markets had anticipated a larger cut of 0.5%.

It can be said that the Fed’s decision to reduce the rate by a typical amount appeared to demonstrate a degree of independence from politics and helped maintain market confidence. It is crucial for the central bank to make policy decisions without being affected by pressure from Trump.

Stephen Miran, appointed by Trump as a member of the Fed Board of Governors, cast the sole dissenting vote and called for a substantial 0.5% rate cut, but there were no other members who agreed to his demand. It is also praiseworthy that the Fed has been able to maintain its internal unity.

To curb historic inflation triggered by the COVID-19 pandemic and other factors, the Fed rapidly tightened monetary policy starting in spring 2022, raising rates to 5.25%-5.5%.

The central bank shifted toward cutting rates in September 2024, but paused due to concerns that the Trump administration’s high tariff policy and other factors would reignite inflation.

The resumption of rate cuts is likely due to the clear cooling of the labor market, which reflects economic trends. In August, growth in nonfarm employment slowed significantly, and the increase from April 2024 to March 2025 was revised downward by as many as 911,000 jobs due to statistical revisions.

At a press conference, Fed Chair Jerome Powell explained the reason for the rate cut, saying that “downside risks to employment have risen.”

If the United States, the driving force of the global economy, falls into recession, it will have a major impact on other countries, including Japan. Now may be the time to give more consideration to the economy.

However, the risk of stagflation, in which higher prices and economic recession occur simultaneously, has been pointed out. The Fed is caught in a dilemma in its efforts to both expand employment and stabilize prices. As high tariffs could eventually push up prices, vigilance against inflation cannot be relaxed.

In the United States, where the income gap is widening, high prices directly hit the households of low-income earners, potentially inviting social unrest. Premature rate cuts must be avoided.

(From The Yomiuri Shimbun, Sept. 19, 2025)