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The Federal Reserve announced its second consecutive cut to its benchmark interest rate on Wednesday, reducing the federal funds rate by a quarter percentage point to a range of 3.75% to 4%. While this will reduce borrowing costs for loans, credit cards and auto financing, lower interest rates can also fuel inflation. And inflation is still a concern: Prices are up 3% year over year as of September — well above the Fed's target rate of 2%. So why is the Fed still cutting rates? The Fed is trying to protect jobs, which is part of its dual mandate to promote maximum employment and stable prices. And while inflation remains elevated, the labor market has been cooling in a way that could slow the economy. "The Fed sees greater downside risk to the labor market than it sees the risk in inflation spiraling away," Ryan Severino, chief economist and head of U.S. research at BGO, tells CNBC Make It. In an August speech, Powell described the labor market as being in a "curious kind of balance," where both demand for workers and labor supply were weakening — an uncommon pattern that often signals the start of a labor market slowdown. Two months later, the picture hasn't improved. "Payroll gains have slowed sharply … and the downside risks to employment appear to have risen," he said in an Oct. 14 speech at the annual meeting of the National Association for Business Economics. While the ongoing government shutdown has delayed some U.S. Bureau of Labor Statistics data releases, the latest available indicators still show a job market losing momentum: Job growth has slowed to about 159,500 jobs, with monthly payroll gains barely keeping pace with population growth. Unemployment has edged up from 4.1% to 4.3% since June. Job openings have fallen to about 7.2 million, the lowest level since 2020. Labor force participation has been trending lower in 2025, with the Dallas Fed suggesting that President Trump's immigration crackdown is a factor. Wage growth has cooled to around 4.1% year over year, down from more than 5% a year ago, according to the Atlanta Fed's Wage Growth Tracker — a sign the balance of power in the job market is shifting toward employers. "The Fed is worried that layoffs will increase sooner and faster than hiring will accelerate," says Severino. In cutting rates, "they are trying to head that off at the pass." That doesn't mean inflation isn't a concern, especially with tariffs increasing costs. As of October, Yale's Budget Lab estimates that tariffs implemented in 2025 have lifted overall prices by about 1.3%, roughly equivalent to a $1,800 loss in household purchasing power. Some economists, however, view tariffs as a one-time price shock — a temporary bump that raises inflation in the short term but not necessarily in a lasting way. By lowering rates gradually, the Fed aims to contain inflation while easing pressure on the job market. As Powell put it in his October speech, there's currently no "risk-free path" as the Fed navigates "the tension between our employment and inflation goals." In the meantime, the Fed is expected to announce another cut before the end of the year, especially if the labor market continues to weaken. The probability of either a 25- or 50-basis-point cut by January is at 93% as of Wednesday afternoon, according to the CME FedWatch Tool. By the end of 2026, the federal funds rate is expected to be closer to 3%, which would mean at least one more cut. Want to level up your AI skills? Sign up for Smarter by CNBC Make It's new online course, How To Use AI To Communicate Better At Work. Get specific prompts to optimize emails, memos and presentations for tone, context and audience. Plus, sign up for CNBC Make It's newsletter to get tips and tricks for success at work, with money and in life, and request to join our exclusive community on LinkedIn to connect with experts and peers.
