Federal Reserve cuts interest rates by 0.25 percentage points amid weaker labor market
The Federal Reserve lowered its benchmark interest rate by 0.25 percentage points on Wednesday, but its chairman, Jerome Powell, suggested the central bank might take a pause before cutting borrowing costs further.
The Fed’s cut lowers the federal funds rate — which banks charge each other for short-term loans — to between 3.75% and 4%, down from its previous range of 4% to 4.25%. The Fed cut rates by the same amount in September, its first cut since December 2024.
At a news conference Wednesday afternoon to discuss the decision, Federal Reserve Chairman Jerome Powell said another rate cut at its next meeting, scheduled for Dec. 10, “is not a foregone conclusion.” That could disappoint some borrowers and investors, given that the Fed last month predicted an additional rate cut for its final meeting of the year.
“There were very divergent views on how to proceed in December” at the central bank meeting today, Powell said. These contradictory views mean that “we have not made a decision regarding the month of December. I say something more here: we should not consider this as inevitable. In fact, far from it.”
He added: “We’ve cut another 50 basis points over the last two meetings, and some are feeling, ‘Let’s take a break here,’ and others are thinking, ‘Let’s go.’
Stocks erased modest gains after Powell’s comments, with the S&P 500 falling 0.2% in afternoon trading and the Dow Jones Industrial Average falling 0.4%.
The central bank’s decision to ease monetary policy aims to support economic growth by reducing borrowing costs, boosting consumer spending and business investment. Although the pursuit US government shutdown Although the publication of the September employment report from the Department of Labor was delayed, other indicators point to a continued slowdown in hiring. ADP’s national employment report, for example, showed that private sector payrolls down 32,000 last month.
In its policy statement Wednesday, the Fed said “downside risks to employment have increased in recent months.”
The Federal Reserve’s so-called dual mandate requires monetary policymakers to keep inflation and unemployment low, with Fed Chairman Jerome Powell stressing last month that risks to the labor market were growing.
While Powell said the Fed is monitoring layoff announcements from large companies such as Amazon, he added that weakness in the labor market does not appear to be accelerating. His comments indicate that another consecutive rate cut this year is not a certainty, financial experts said.
“The markets’ knee-jerk reaction to the Fed meeting (and press conference) was to sell stocks and bonds, because Chairman Powell said another rate cut in December was not a sure thing,” Chris Zaccarelli, chief investment officer of Northlight Asset Management, said in an email. Investors “were negatively surprised that future cuts could be taken off the table.”
The Federal Open Market Committee, or FOMC, the committee that sets the Fed’s monetary policy, is not expected to meet on interest rates in November.
Data failure
The near-total blackout of government economic data during the shutdown could complicate the Fed’s decision-making, experts say. Typically, Fed officials can draw on a host of official reports, from measures of job growth to markers of inflation, to seek to determine the best path forward for monetary policy.
“While today’s rate cut and the general direction of future policy remain relatively clear, the committee’s guidance on the economic situation is needed more than ever,” Bankrate financial analyst Stephen Kates said in an email. “A prolonged government shutdown and ongoing tariff negotiations continue to introduce significant uncertainty into the immediate outlook for monetary policy.”
Powell noted that the lack of official economic data could complicate the Fed’s decision in December, given that the central bank relies on such information to assess the economy.
“What do you do when you’re driving in fog? You slow down,” Powell said.
On Wednesday, 10 of the 12 FOMC members voted in favor of the quarter-point cut, with two members opposing it. Fed Governor Stephen Miran disagreed, preferring a 0.50 percentage point cut, as he did at the September meeting. Kansas City Fed President Jeffry Schmid also disagreed, saying he preferred not to change rates.
Battle against inflation
Even though the Fed is now focusing on the weak labor market, its battle against inflation is not over. The Fed raised rates after consumer prices soared during the pandemic, with inflation hitting a 40-year high of 9.1% in June 2022.
Because higher interest rates make borrowing more expensive, businesses and consumers typically respond by cutting spending, which dampens demand across the economy and dampens inflation. Since mid-2022, inflation has returned to an annual rate of 3% as of September, although this remains above the Fed’s target of a 2% annual pace.
Even though the large-scale tariffs imposed by the Trump administration are starts to flow on consumer prices, the impact was more muted than economists predicted earlier this year. Some companies are absorbing some of the tariff costs, while others set aside imports earlier in the year to anticipate import duties.
“Even as inflation remains higher than comfortable, the labor market remains showing signs of weakness and the desire to further stimulate the economy will likely continue to outweigh inflationary concerns,” said Steve Rick, chief economist at financial services firm TruStage.
