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The U.S. Federal Reserve proceeded with an interest rate cut, prioritizing concerns about a potentially weakening labor market over persistent inflation worries.
The decision arrived despite the ongoing U.S. government shutdown, nearing a month in length, which has delayed the release of critical economic data. Economists noted that this has left central bankers with limited insight into the current state of the job market.
In a statement released Wednesday, the U.S. central bank announced a 0.25 percentage point reduction in its benchmark lending rate, establishing a new target range of 3.75% to 4%.
This move follows the Fed’s previous interest rate cut last month, the first such reduction since December of the prior year. While economists anticipated further easing of monetary policy, the current data limitations have introduced uncertainty regarding the trajectory of future rate adjustments.
The decision to lower rates was not unanimous, with two voting members of the Fed’s committee dissenting.
Stephen Miran, currently on leave from his role leading the U.S. President’s Council of Economic Advisers, advocated for a more substantial 0.5 percentage point cut. Jeffrey Schmid, president of the Federal Reserve Bank of Kansas City, voted to maintain the existing rate level.
The Fed’s latest action brings its key lending rate to its lowest point in three years, effectively lowering borrowing costs across the U.S.
Concerns about a cooling job market prompted the Fed to resume its rate-cutting cycle in September. In its official policy statement, the central bank reiterated that “job gains have slowed this year” and that the unemployment rate, while remaining low through the summer, has recently “edged up.”
During a press conference following the rate cut announcement, Fed Chair Jerome Powell characterized the labor market as “less dynamic and somewhat softer” compared to earlier in the year, citing factors such as lower immigration levels.
However, he clarified that the perceived weakness in the job market does not appear to be intensifying.
The ongoing government shutdown has delayed the release of the official monthly jobs report for September, hindering central bankers’ ability to fully assess the labor market’s performance since their previous meeting.
Alternative data sources, including private-sector reports, have indicated a continuing trend of sluggish hiring. For example, payroll firm ADP reported that the U.S. economy lost 32,000 jobs in September.
The Labor Department did release September’s inflation data last week. The reported figure of 3% year-over-year was slightly below economists’ expectations, bolstering the likelihood of a rate cut.
Earlier in the year, inflation concerns related to tariffs took precedence as the Trump administration implemented tariffs on numerous major trading partners.
While inflation remains above the Fed’s 2% target, economists at Bank of America noted that the milder-than-expected September inflation reading allowed the Fed to prioritize stimulating the labor market by lowering rates. They added that while tariffs are impacting some consumer prices, inflation is under control otherwise.
“Inflation away from tariffs is actually not so far from our 2% goal,” Powell told reporters, expressing hope that tariffs would primarily result in one-time price increases for select consumer products.
The Fed also announced Wednesday that it would halt the reduction of its balance sheet – its portfolio of government debt and mortgage-backed securities – on December 1.
For over three years, the central bank has been unwinding its asset purchases made during the pandemic and previous financial crises, a process intended to stimulate the economy and lower interest rates. This unwinding is now expected to conclude, as anticipated, amidst emerging signs of financial market stress.
Prior to Wednesday’s announcement, Wall Street had anticipated another quarter-point interest rate cut at the Fed’s final meeting of the year in December.
However, those expectations diminished after Powell stressed that a December cut “is not to be seen as a foregone conclusion – in fact, far from it.”
“Future moves are becoming more contentious,” observed Michael Pearce, deputy chief U.S. economist at Oxford Economics. “We expect the Fed to slow the pace of cuts from here.”
The situation remains fluid, and the Fed’s perspective could shift before its next meeting. The availability of three new jobs reports could “significantly change perceptions of the labor market for better or worse,” according to a note from JP Morgan’s chief U.S. economist, Michael Feroli.
Conversely, a prolonged government shutdown and the resulting data limitations could prompt the Fed to maintain its current stance at the end of the year.
“What do you do if you’re driving in the fog? You slow down,” Powell stated.
He told reporters that “there were strongly differing views about how to proceed” among members of the Fed’s committee, and the final decision will hinge on upcoming economic data.
“We’re going to collect every scrap of data we can find,” Powell affirmed.
The Fed chair has been under pressure from President Trump, who has repeatedly urged him to lower interest rates.
Trump recently suggested that he might announce a replacement for Powell, whose term expires next May, before the end of the year.
Trump sought to remove Cook from the central bank’s board in August, the first time a president has tried to fire a Fed governor.
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