The Federal Reserve slashed interest rates for the first time since December and put two additional cuts on the table for the remainder of the year, reflecting a shift in the central bank’s view of the labor market. At the conclusion of their meeting on Wednesday, policymakers delivered on expectations for a 25 basis-point reduction in the fed funds rate. Fed Chair Jay Powell said the move could be characterized as a “risk-management cut” with officials attempting to juggle sticky inflation and a hiring slowdown. Based on updated economic projections, the Fed signaled that it could cut rates by another 50 basis points this year. The Bank of Canada also lowered rates on Wednesday and said it is “proceeding carefully,” citing a weaker domestic economy and tariff-related risks.

Trade negotiations and a legal challenge to the Trump administration’s reciprocal tariffs remain unsettled, contributing to a blurry outlook for policymakers and market participants. Thus far, tariffs’ impact on inflation has been relatively concentrated among certain categories of imported goods. This has allowed the Fed to prioritize growth and a healthy labor market over the risk of longer-term price pressures. In a press conference, Powell reiterated that it is a “reasonable base case” to believe tariffs will result in just a short-lived boost to inflation. The amount of tariff-related costs passed through to consumers has been “slower and smaller” than previously expected, Powell added.

Daleep Singh, Vice Chair and Chief Global Economist at PGIM, explains where Fed policy may be headed in the coming months, market implications from easy monetary policy, and potential risks to the outlook.