While widely expected, the overnight interest rate cut by the US Federal Reserve is nonetheless welcome.
The Federal Open Market Committee (FOMC) voted 11 to 1 to cut the official federal funds rate in the world's largest economy by 0.25%. Fed governor Stephen Miran was the sole dissenter, voting instead for a 0.50% cut.
But with the vote almost unanimous, this brings the new official rate down to the range of 4.0% to 4.25%. And it represents the first interest rate cut from the US Fed since December, with central bank holding tight amid worries that President Donald Trump's tariffs could stoke inflation.
Commenting on the decision, Federal Reserve chair Jerome Powell said (quoted by Bloomberg), "Labor demand has softened, and the recent pace of job creation appears to be running below the break-even rate needed to hold the unemployment rate constant."
But with the rate cut already priced into markets, the S&P 500 Index (SP: .INX) closed the day down 0.1% while the tech-heavy Nasdaq Composite Index (NASDAQ: .IXIC) slipped 0.3%.
In Australia today, the S&P/ASX 200 Index (ASX: XJO) is down 0.6% in early afternoon trade.
What's next for US interest rates?
With ongoing pressure from the Trump administration, the Fed had been expected to deliver two more interest rate cuts in 2025.
Whether that occurs, remains to be seen.
Likely explaining the tepid reaction in US stock markets and on the ASX 200 today, Powell said the Fed would make its next decisions based on a "meeting-by-meeting situation."
The FOMC said inflation in the US had "moved up and remains somewhat elevated" while risks in the labour market had increased.
Commenting on the outlook for further interest rate decreases, Stephen Stanley, chief economist at Santander US Capital Markets, said (quoted by Bloomberg):
This doesn't feel like the beginning of an aggressive easing campaign, the kind that you might see if we were heading into recession. The path is going to be very much dependent on how the economy plays out from here.
According to Bolvin Wealth Management Group's Gina Bolvin:
The Fed's 25 basis point cut is a clear signal: the softening labour market and stubborn inflation have pushed policymakers to act — but gradually. This isn't a pivot, it's a measured step.
For investors, this means modest rate relief, not fireworks. Rate-sensitive sectors like housing and consumer discretionary may benefit, but caution remains key. The Fed is walking a fine line, and upcoming inflation and jobs data will determine what comes next.
And Christian Chan at AssetMark added;
Overall, today's Fed action could be viewed as a "goldilocks" move for the markets – growth expectations higher, the Fed is very aware of the risks to both the labor market and inflation, more rate cuts to come.
Stay tuned!
