The Federal Reserve has cut interest rates for the second time in a row, reducing its benchmark rate to a range of 3.75% to 4.00%. The decision was made despite the ongoing government shutdown, which has left policymakers without key data to guide monetary policy. The central bank’s move was not unanimous, with two members dissenting from the decision. President Trump’s newly appointed governor, Stephen Miran, wanted to cut rates by half a percentage point, while Kansas City Fed president Jeff Schmid favored holding rates steady.
The Fed’s decision to cut rates was influenced by concerns about the economic outlook, including renewed trade tensions with China and the potential impact of tariffs on the labor market. However, the central bank also acknowledged that inflation remains above its 2% target, and that the job market has slowed down this year. The unemployment rate has edged up, but remains low.
The government shutdown has made it difficult for policymakers to assess the state of the economy, with key data such as the September jobs report and October inflation data still unpublished. The Fed’s statement acknowledged the challenges posed by the shutdown, saying that its assessment of the economy is based on “available indicators” and that it will “continue to monitor the implications of incoming information for the economic outlook.”
The Fed also announced that it will stop shrinking its balance sheet on December 1, which is a change in language that follows Fed Chair Jerome Powell’s comments earlier this month. The central bank’s long-stated plan is to stop the balance sheet runoff when reserves at the Fed are somewhat above the level it judges as “ample.”
In a press conference following the meeting, Powell emphasized that another rate cut at the Fed’s December meeting is “not a foregone conclusion.” He noted that the benchmark rate is now 150 basis points “closer to neutral” than it was a year ago, and that there is a growing chorus of voices suggesting that the Fed should wait before cutting rates again. Markets reacted to Powell’s cautionary tone, with the odds of a December rate cut falling from 87% to 56%.
The Fed’s challenge is that inflation remains sticky, hovering above its 2% target, while the job market has slowed down. The central bank’s decision to ease monetary policy again follows months of pressure from President Trump to bring rates down. The president and his White House allies have repeatedly accused Powell of being “too late” to cut rates. The Fed’s next move will be closely watched, as it navigates the challenges posed by the government shutdown and the uncertain economic outlook.