The Federal Reserve made a significant decision on Wednesday by cutting its key interest rate for the second time this year. The aim of this rate reduction is to support economic growth and foster hiring, even as inflation remains elevated. However, Fed Chair Jerome Powell emphasized that further rate cuts are not guaranteed, citing the ongoing government shutdown that has disrupted vital economic reports and highlighted sharp divisions among the 19 Fed officials involved in interest rate discussions.
The recent rate cut, which decreased the benchmark rate by a quarter of a point, brings the Federal Reserve's key rate down to approximately 3.9%, down from 4.1%. This adjustment follows a period where the central bank had raised rates to about 5.3% in 2023 and 2024 to combat the most significant inflation surge seen in four decades. The Fed had previously implemented three cuts last year, reflecting its ongoing efforts to stabilize the economy.
Despite the interest rate cut, the Federal Reserve faces numerous challenges, including sluggish hiring and inflation that remains above the Fed's target of 2%. Complicating matters further, the central bank is navigating without the usual economic indicators it relies upon from the government, such as monthly reports on jobs, inflation, and consumer spending, all of which have been suspended due to the government shutdown.
Financial markets had largely anticipated another rate reduction in December, but Powell's comments led to a drop in stock prices. The S&P 500 remained nearly unchanged while the Dow Jones Industrial Average closed slightly lower. Analyst Gennadiy Goldberg from TD Securities noted that Powell’s remarks “poured cold water” on the notion that the Fed was on autopilot regarding a rate cut in December.
When questioned about the implications of the government shutdown, which began on October 1, Powell acknowledged that while some data is still accessible, the Fed is operating with limited information. He stated, “If there were a significant or material change in the economy, one way or another, I think we’d pick that up through this.” However, he also recognized that the lack of comprehensive data might necessitate a more cautious approach in the upcoming December meeting.
The Federal Reserve typically raises rates to combat inflation and cuts them to encourage borrowing and spending, which in turn supports job growth. Presently, the Fed is balancing the risks of a slowing job market along with persistent inflation, hence the decision to lower borrowing costs while still maintaining rates at a level that avoids exacerbating inflationary pressures.
Interestingly, Powell indicated that the Fed perceives inflation as becoming a less significant threat. He pointed out that when excluding the effects of former President Donald Trump’s tariffs, inflation levels are “not so far from our 2% goal.” Recent reports have shown a slowdown in inflation related to apartment rents and various services, suggesting a potential stabilization.
The economy may be showing signs of recovery from a lackluster first half of the year, which could lead to improved job growth in the coming months, thereby diminishing the necessity for further rate cuts. Powell noted that some members of the committee are considering whether to adopt a more cautious stance regarding rate adjustments. “For some part of the committee, it’s time to maybe take a step back and see if whether there really are downside risks to the labor market,” he stated.
During the recent meeting, two of the 12 officials who vote on interest rate decisions expressed dissent. Jeffrey Schmid, President of the Federal Reserve Bank of Kansas City, voted against the cut, advocating for no change due to concerns over persistent inflation. Conversely, Fed governor Stephen Miran dissented for the second consecutive meeting in favor of a half-point cut, reflecting the varying perspectives within the central bank.
Additionally, the Federal Reserve announced that it would halt the reduction of its massive securities holdings, a strategy implemented during the pandemic and post-2008-2009 Great Recession. This change, effective December 1, could lead to slight reductions in longer-term interest rates for products like mortgages, although its overall impact on consumer borrowing costs may be limited.
With the disruption of government data, tracking the economy has become increasingly challenging. Critical reports, such as September’s jobs report, remain postponed, and upcoming hiring figures may also face delays. The White House has indicated that October’s inflation report may never be published, further complicating the Fed's ability to make informed decisions.
As the economic landscape evolves, the Federal Reserve is closely monitoring developments, especially the recent wave of layoffs from major corporations like UPS, Amazon, and Target. Powell confirmed that these announcements are being watched “very carefully,” given their potential impact on the unemployment rate and overall economic stability.
