The Federal Reserve cut its interest rate target on Wednesday for the second time since President Donald Trump entered his second term, a further move toward easing monetary policy.
After a two-day meeting of its monetary policy committee in Washington, the Federal Open Market Committee announced it would move its rate target to a range of 3.75% to 4%, down from 4% to 4.25%.
Investors widely expected the move, which comes after the Fed began cutting interest rates in September. President Donald Trump and others in the administration have been pushing for rate cuts after months of the Fed, led by Chairman Jerome Powell, holding rates steady to drive down inflation.
GOVERNMENT SHUTDOWN FALLOUT SHIFTS FROM FEDERAL WORKERS TO WELFARE RECIPIENTS
Fed governor Stephen Miran, who was recently nominated by Trump and confirmed by the Senate, dissented on the rate decision. He preferred a larger half percentage point cut. Jeffrey Schmid, the president of the Federal Reserve Bank of Kansas City, also dissented, but he favored no cut at all.
The move also comes in the middle of a protracted government shutdown, which could end up being the longest government shutdown in U.S. history if it goes for another week or so.
The Fed also announced on Wednesday that in December, after three years, it will be ending its cycle of “quantitative tightening” — that is, the shrinking of its massive balance sheet. The central bank’s assets have declined from nearly $9 trillion in 2022 to around $6.6 trillion. Those assets are mostly Treasury securities and mortgage-backed securities guaranteed by federal agencies that the Fed bought in massive quantities during the pandemic.
The Fed’s move to lower its target interest rate comes amid a slowdown in the labor market that has raised fears that more monetary easing may be needed to prevent a recession.
Recent employment reports have shown job growth slowing to near the pace needed to keep up with population growth.
But the government shutdown has made the Fed’s job much more difficult because federal employment data, considered the gold standard of job data, have not been produced. Many employees at the Bureau of Labor Statistics are furloughed and will not work until the government reopens.
Still, the most recent available data show the economy added just 22,000 jobs in August, and the unemployment rate rose to 4.3%. Also, the July jobs report revealed that some 258,000 fewer jobs were added in May and June than previously reported.
Perhaps the most closely watched analog for the BLS’s monthly employment reports is from payroll company ADP, which releases its monthly numbers just ahead of the official reports. That report showed that private employers cut some 32,000 jobs in September, a concerning sign for the labor market and the economy.
The Fed has a dual mandate: price stability, which is keeping inflation at a healthy level, and maximum employment, which is ensuring the labor market stays above water.
The impetus for the interest rate cut was almost entirely to shore up the maximum employment side of the mandate, as inflation is still running above the Fed’s preferred 2% level.
CONSUMER CONFIDENCE FALLS SLIGHTLY AS GOVERNMENT SHUTDOWN WEIGHS ON HOUSEHOLDS
Despite the shutdown, the BLS has still released the consumer price index numbers for September. The CPI is the most closely watched gauge of inflation.
Inflation rose one-tenth of a percentage point to 3% for the year ending in September, the BLS reported amid the shutdown. That is still notably a full percentage point higher than Fed officials would like.
