Inflation has remained relatively high, meaning goods are becoming more expensive, particularly the cost of food, official figures show.
The US central bank has cut interest rates for the first time this year, in a move President Donald Trump will likely declare is long overdue.
Mr Trump has demanded cuts to borrowing costs from the Federal Reserve ever since worries emerged in the world's largest economy that his trade war would stoke US inflation.
The president - currently in the UK on a state visit - has, on several occasions, threatened to fire the Fed chair Jay Powell and place his own supporters on the bank's voting panel.
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He was yet to comment on the rate decision.
The fallout from the row has resonated globally, sparking worries about central bank independence. Financial markets have also reflected those concerns.
The bank, which has a dual mandate to keep inflation steady and maintain maximum employment, made its move on Wednesday after a major slowdown in the employment market that has seen hiring ease sharply.
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The latest economic indicators have shown caution over spending among both companies and consumers alike.
The Fed said the economy had moderated.
Inflation, while somewhat elevated due to the effects of higher import costs from the trade war, has not taken off as badly as some economists, and the Fed, had initially feared.
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Its 12-member panel backed a quarter-point reduction in the Fed funds rate to a new range of between 4% to 4.25%.
The effective interest rate is in the middle of that range.
Crucially for Mr Trump, who is trying to inspire growth in the economy, the Fed signalled more reductions ahead despite continued concern over inflation.
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Financial markets saw a further two quarter-point rate cuts before the year's end.
The dollar, which has weakened in recent days on the back of expectations of further rate cuts, fell in the wake of the decision and the Fed's statement.
It was trading down against both the euro and pound. Sterling was almost half a cent up at $1.37.
This Fed meeting was the first with new Trump appointee Stephen Miran on the voting panel.
He was chairman of the president's Council of Economic Advisers before being handed the role this week.
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His was a sole voice in the voting for a half percentage-point cut. It is clear, though the identity of participants' forecasts are not revealed, his was the lone voice in calling for a further five quarter-point reductions this year.
Mr Trump has sought to fire a member of the Fed's board, Lisa Cook, to bolster his position further, but that decision is currently subject to a legal challenge.
At a news conference, Mr Powell declined to answer a question on whether the Fed's independence was threatened by the presence of Mr Miran.
He merely outlined that he had been welcomed to the rate-setting meeting and that the central bank was committed to its dual mandate.
Isaac Stell, investment manager at Wealth Club, said of the rate cut: "The decision is unlikely to satisfy the president, who made it publicly known he expected a "big cut", not the 0.25% the Fed has opted for today.
"Unfortunately, the timing and circumstances of today's move make it appear more like a concession rather than a strategic policy shift, potentially fuelling concerns about the Fed's independence."
