The Federal Reserve has cut its main interest rate by a quarter point to a range of 3.75% to 4%, marking the second rate reduction this year. The decision was made after a two-day meeting, with Fed Chair Jerome Powell warning of “strongly differing views” on how to proceed with rates in the future. Two members, Stephen I. Miran and Jeffrey R. Schmid, dissented from the decision, with Miran advocating for a half-point cut and Schmid advocating for no change.
The rate cut comes as the Fed navigates a delicate balance between reducing inflation and achieving maximum employment. Inflation rose less than expected in September, but still remains above the Fed’s 2% target, while job gains have slowed significantly. Powell noted that the risks are to the upside for inflation and to the downside for employment, making it challenging for the Fed to address both issues simultaneously.
The Fed’s median projection released in September forecast two further quarter-point cuts in 2025, but differing views among committee members have thrown a potential December cut into question. Powell emphasized that a further reduction in the policy rate at the December meeting is “not a foregone conclusion” and that the Fed will carefully consider the data before making a decision.
Traders currently see approximately 66% odds of a quarter-point cut in December, according to the FedWatch tool. Powell also highlighted other complications for the Fed, including uncertainty regarding tariffs, the potential impact of artificial intelligence investment, and the government shutdown, which has left the central bank without key data.
The Fed is taking a cautious approach, with Powell noting that “what do you do when you’re driving in a fog? You slow down.” The central bank is also monitoring the potential impact of AI on the economy and labor market, with Powell acknowledging that it could have implications for job creation. However, he noted that the initial claims data does not yet show a significant impact, and that investments in AI are driven by longer-term assessments of the technology’s potential to drive higher productivity. Overall, the Fed’s decision reflects its ongoing efforts to balance its dual mandate and navigate a complex economic landscape.