For the first time in nine months, the Federal Reserve has cut interest rates – this time, by a quarter of a percentage point. It means a new range of 4 to 4.25 percent.
The cut is not as big as what the White House has been calling for, and it comes as the job market struggles and the Trump administration continues to put pressure on the Fed.
WAMC spoke with University of Massachusetts Amherst Economics Professor Gerald Epstein about the Federal Reserve, what the cut means, and the precedent set by the White House challenging the Fed’s independence.
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Gerald Epstein: The significance is more symbolic than anything else, because … it's a very small cut. [It’s] symbolic in several senses: one, the Fed has not lowered rates for almost a year - I think nine months.
Two, there's the political pressure from President Trump, but three, it indicates that the Fed is perceiving that there's been a weakness, or likely to be some weakness in the economy, in the labor market, and is more concerned now about the labor market being weak than it is about potential, future inflation, at least for the moment.
WAMC: Over the course of Wednesday's press conference and in past statements, Federal Reserve Chair Jerome Powell has referenced inflation as being better compared to 2022 but still not great. As you touched on, employment figures are tepid - what do you make of Powell's continuing approach, or rather the approach of the Federal Reserve in general?
Epstein: Well, the Fed's in kind of a tough place.
The Fed, as you know, has a dual mandate given to it by Congress, which created the Federal Reserve Act. The dual mandate is - maximum employment and stable prices.
When unemployment is going up, the Fed's response should be to lower interest rates to try to goose the economy and increase spending, but when inflation is going up … above the target - the Fed should be raising interest rates in order to weaken the economy slightly and try to reduce spending, and when it's just one or the other happening, it’s no problem, but right now, the danger is that we have unemployment going up and prices going up above their target.
And so, the Fed is kind of between a rock and a hard place and as Powell said in his discussion, the recent evidence has been that inflation isn't going up as rapidly as they feared from the tariffs so far - and I'll come back to that - but that the labor market does seem to be weakening, and so it slightly tipped them in favor of focusing on unemployment rather than inflation.
But it seems pretty clear that there's still, potentially, quite a bit of inflation in the pipeline as a result of two things: One is the tariffs that have been imposed, and the second is the anti-immigration policies that have been imposed. The latter has reduced the labor force and might start creating shortages in certain kinds of markets and when the supply goes down and if demand stays up, then that leads to price increases.
So, both of those factors are in the pipeline. We started seeing evidence, to some extent, of both of them, but they haven't taken off in a major way yet.
WAMC: In ideal conditions, how do rate cuts usually influence things like employment and wage growth?
Epstein: There are two main components of spending that rate cuts might affect and the more spending there is, the more demand there is for products and the more businesses are likely to want to hire more workers.
So, rate cuts, if they work, should increase spending and should increase employment and the way they do it is: there are two main components. One is consumption spending by households, which is very important because it constitutes about 70 percent of total spending, and the second
important component is investment and by investment, I mean the decision by firms to build more factories, to buy more plants and equipment - that kind of investment.
So, lower interest rates can increase spending by households by, for example, reducing car loan interest rates, credit card interest rates, mortgage interest rates and so forth and it can increase investment spending by firms by making it cheaper for firms to borrow money to build a big factory or to buy new, cutting-edge equipment.
So those are the two ways, in theory, that lower interest rates can increase spending but there are a lot of speed bumps between the Fed lowering the federal funds rate - which is a very short term interest rate that it controls - there a lot of speed bumps between that and it actually lowering the kinds of interest rates that households and businesses face.
WAMC: At one point during Wednesday's press conference, Powell referred to this as a risk management cut - professor, what do you make of that characterization?
Epstein: That makes sense to me, because even though there's a lot of concerns both about the labor market and about potential inflation, there's still a huge amount of uncertainty there.
There's no crystal ball saying what's going to happen, and so, I think, as Jerome Powell put it, they just can look at the data that is coming in and it does seem like there's been a somewhat increased risk in the labor market - they can't be sure, but this is just trying to get ahead of the curve a little bit by lowering interest rates.
And, [Powell] refused to say that they're going to keep lowering interest rates in the next couple of meetings, even though I think the markets think that's where things are headed because he understands that there could be some surprise data coming down the pike on higher-than-expected inflation.
WAMC: All the while this is happening, the Trump administration has been applying a lot of pressure on the Federal Reserve to issue cuts well-before this and this most recent move by the Federal Reserve featured dissent from its newest member, Governor Stephen Miran, a Trump nominee who was just confirmed by the Senate.
He reportedly wanted a larger half-point cut, not just a quarter.
This, paired with threats of firing Powell challenges to the Reserve’s independence: is there precedence for this kind of pressure?
Epstein: Well, it's in some ways unprecedented. I mean, if you go back, for example, to President Nixon - he put a lot of pressure on Arthur Burns, who was the chair at that time, but it was kind of behind-the-scenes. It wasn't so public. It wasn't so Trumpian in a sense - so loud and so public.
Presidents often want the Fed to do something different than what they're doing, but that's why Congress has decided to set up the system in such a way that the Federal Reserve is somewhat insulated from pressure by the President. The President has a lot of power over the Fed, ultimately. Over the course of two to four years, the President will be able to name a number of members to the Board of Governors, et cetera, and therefore influence the decision-making of the Fed.
But the president cannot, in a short time, completely revolutionize the personnel of the Federal Reserve. It takes time, and President Trump seems quite impatient about this, so it is unprecedented, and it's also unprecedented because, not just of the pressure, but the form that it has taken, particularly in the case of Lisa Cook, where the President claimed that Lisa Cook has violated some kind of law and therefore has tried to fire her - that's totally unprecedented, that has never happened before to my knowledge.
So yeah, we're in kind of uncharted territory in that regard.
WAMC: What do you make of the actions regarding Cook? Right before the latest Federal Reserve decision, an appeals court ruled in her favor, letting her be reinstated for now, despite the Trump administration's move to fire her.
She's been accused of making false statements on a mortgage application by the administration - she's denied the allegations, and the White House is only continuing to hone in on the case…
Epstein: It's very concerning. First of all, it seems to be the accusations against her seem to be wrong, not true. There's been evidence coming out that she did not violate this, but even if she had, it hasn't been proven and the way in which it came to the fore was by one of Trump's associates combing through records to try to identify something to get somebody at the Fed, just as they did with others: Letitia James in New York and Adam Schiff in in California.
This is weaponizing the government to go after political enemies or people who are standing in the President's way. So, this is just unacceptable, really, and so, it's not only unprecedented, it's just plain wrong and ultimately, I think, will undermine not only the credibility of the Federal Reserve, which is the most important central bank in the world, but I think … it has potential to undermine the credibility of the U.S. government. So, I hope that after this, President Trump takes a step backwards, rather than pursuing this further.
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UMass Amherst Professor Gerald Epstein serves as both a professor of economics and as co-director of the Political Economy Research Institute at the University of Massachusetts.
This piece originally aired on Thursday, Sept. 18, 2025.
