Coming as a much needed relief, the Federal Reserve has slashed its target for the all-important lending rate by 0.25 percentage points. The new effective range is therefore 3.75% to 4%. The U.S. economy has not experienced the likes of these catastrophic job loss figures since the Great Depression. According to a bleak new report from payroll-processing giant ADP, that includes 32,000 jobs lost in September. The central bank took the cut after years of economic hardship. This decision arrives at a time of great uncertainty following last month’s government shutdown that has postponed the release of the official monthly jobs report.
President Trump is actively lobbying for low interest rates. This puts the spotlight on Federal Reserve Chairman Jerome Powell, whose term ends next May. Speculation looms over the potential announcement of Powell’s replacement as early as this year, following Trump’s repeated calls for easier monetary policy. The recent rate cut signals an attempt to stimulate economic activity and counteract rising unemployment.
The current government shutdown has central bankers “flying blind” in terms of knowing whether the job market is tightening. This becomes more problematic given the challenges that face policymakers in crafting an effective monetary policy. They need to thread the eye of the needle between inflation and jobs. In September, inflation was 3% year-over-year, a tad less than economists expected.
Economists at Bank of America noted, “Although inflation remains elevated, policymakers are slightly more focused on downside risks to the employment mandate.” The Fed has recently become much more concerned with rising unemployment and an economic recession. This concern could very well cause them to want to ease more through interest rate cuts.
The economic picture over the past few months has shifted wildly. Already, fears of inflation pushed by the new tariffs have started to unfurl, mainly thanks to President Trump’s $46 billion in tariffs on our closest trading partners. These duties have increased costs for American consumers and businesses. At this moment, it’s more important than ever for the Federal Reserve to step up and provide emergency measures to stabilize the economy.
Wall Street analysts are jumping on these changes like hawks. Most everyone’s taking odds on at least one more quarter-point slash at the Fed’s last confab of the year in December. As of this writing, according to CME FedWatch, investors are pricing in over an 80% chance of just that. This illustrates that they expect extensions of monetary easing just about everywhere.