Rates Cut

The Federal Reserve reduced interest rates by a quarter of a percentage point on Wednesday, lowering its benchmark rate to a range of 3.75% to 4%.

Context

The Fed cut rates by 1 percentage point across three meetings in late 2024 before pausing in January to assess the impact of President Trump's trade and immigration policies. The Fed resumed cuts in September despite inflation remaining above its 2% target. Trump has called on the Fed to cut rates faster, repeatedly attacking Fed Chair Jerome Powell publicly. Trump also installed Stephen Miran, his own economic adviser, as a Fed governor and has attempted to fire Lisa Cook, a Biden appointee, marking unprecedented presidential interference with the traditionally independent central bank.

Rate Cut

On Wednesday, the Fed lowered the interest rate it charges banks for overnight loans, marking the second straight meeting where the Fed cut rates. At the same time, the central bank announced it would stop shrinking its bond holdings starting December 1, which will keep more money flowing through the financial system that can help lower borrowing costs and support economic activity.

Powell said in a news conference that "conditions in the labour market seem to be gradually cooling" and that risks to the job market had "risen in recent months." 

Shutdown Complications

The quarter-point rate cut came almost one month into the federal government shutdown, which has left the Fed without key economic data it normally relies on to make decisions. The central bank could be operating without official data on jobs, inflation, and growth when it meets in December.

The shutdown has forced the Fed to rely more heavily on private-sector data and reports from regional Fed banks. Powell acknowledged the challenge, saying there is no "risk-free path" forward.

Future Cuts

The rate cut passed with a split vote, with Kansas City Fed President Jeffrey Schmid wanting to keep rates unchanged and Miran pushing for a larger half-point cut. 

Powell said in his press conference that officials were deeply divided on what to do next. "At this meeting, there were strongly differing views about how to proceed. A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it," Powell said. He added that "we haven't made a decision about December."