The Federal Reserve on Wednesday lowered its benchmark interest rate by 0.25 percentage points, marking its second consecutive rate cut this year as the U.S. economy contends with a sharp slowdown in hiring.
The Fed cut lowers the federal funds rate — what banks charge each other for short-term loans — to between 3.75% and 4%, down from its prior range of 4% to 4.25%. The Fed reduced rates by the same amount in September, its first cut since December of 2024.
In a Wednesday afternoon press conference to discuss the decision, Federal Reserve Chair Jerome Powell said another rate cut at its next meeting, set for Dec. 10, “isn’t a foregone conclusion.” That may disappoint some borrowers and investors given that the Fed last month had penciled in an additional rate cut for its final meeting of the year.
“There were strongly differing views on how to proceed in December” during the central bank’s meeting today, Powell added. Those conflicting views mean “we haven’t made a decision about December. I’m saying something in addition here — that it’s not to be seen as a foregone conclusion. In fact, far from it.”
The central bank’s move to ease monetary policy is aimed at shoring up economic growth by lowering borrowing costs, spurring consumer spending and investment by businesses. Although the ongoing U.S. government shutdown has delayed release of the Labor Department’s September jobs report, other indicators point to a continued slowdown in hiring. The ADP National Employment Report, for instance, showed private-sector payrolls shrinking by 32,000 last month.
In its policy statement on Wednesday, the Fed said “downside risks to employment rose in recent months.”
The Federal Reserve’s so-called dual mandate requires monetary policymakers to keep both inflation and unemployment low, with Fed Chair Jerome Powell noting last month that risks to the labor market are growing.
“In resuming its rate-cutting cycle, the Fed is responding primarily to signs of weakening labor demand,” Seema Shah, chief global strategist at Principal Asset Management, said in an email. “The apparent softening in the jobs market appears to have prompted a preemptive move to prevent further deterioration, with September’s rate reduction likely marking the start of a sequence of cuts.”
Shah added that she expects an additional 0.25 percentage point cut at the Fed’s Dec. 10 meeting. The Federal Open Market Committee, or FOMC, the panel that sets the Fed’s monetary policy, isn’t scheduled to meet on interest rates in November.
The near total blackout on government economic data during the shutdown may complicate the Fed’s decision-making, experts said. Typically, Fed officials are able to draw on a host of official reports, ranging from measures of employment growth to inflation markers, as they seek to determine the best path for policy.
“While today’s rate cut and the general direction of future policy remain relatively clear, guidance on the committee’s perspective on economic conditions is more necessary 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 monetary policy outlook.”
Ten of the 12 FOMC members voted in favor of the quarter-point cut, with two members objecting. Fed Governor Stephen Miran dissented, preferring a 0.50 percentage point cut, as he did at the September meeting. Kansas City Fed President Jeffry Schmid also dissented, saying he preferred no rate change.
Inflation battle
While the Fed is now focused on weakness in the labor market, its battle against inflation isn’t over. The Fed cranked rates higher 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 it more expensive to borrow, businesses and consumers typically react by paring spending, which dampens demand throughout the economy and cools inflation. Since mid-2022, inflation has receded to an annual rate of 3% as of September, although that remains higher than the Fed’s target of a 2% annual pace.
While the Trump administration’s wide-ranging tariffs are starting to trickle through to consumer prices, the impact has been more muted than economists had predicted earlier this year. Some businesses are eating some of the tariff costs, while others stocked up on imports earlier in the year to get ahead of the import duties.
“Though inflation is still higher than comfortable, the jobs market is holding on to signs of weakness, and their desire to stimulate the economy further is likely to continue outweighing inflation concerns,” said Steve Rick, chief economist at financial services company TruStage.
Alain Sherter
