It’s a big move by the US central bank. Specifically, it reduced the target for its main monetary policy interest rate by 0.25 percentage points, to a range of 3.75% to 4%. The intended purpose behind this change is to promote economic development. Most importantly, it’s projected to spur a wave of rate reductions, which will lower borrowing costs across the country. The Federal Reserve’s decision follows a buildup of storm clouds on the economic horizon. The economy actually shed 32,000 jobs last month, according to payroll giant ADP.
Federal Reserve Chairman Jerome Powell faces increasing pressure from President Donald Trump, who has repeatedly urged the central bank to take actions that would lower interest rates. The current government shutdown has added an unprecedented level of angst to the mix. It has delayed the publication of the official September jobs report and constricted central bankers’ understanding of the labor market since their last meeting. Indeed, economists have called the current situation one that has left the Fed “flying blind” on emerging employment trends.
Wall Street analysts are all abuzz with speculation. They expect one more quarter-point cut at the Fed’s last meeting of the year in December. Investors are pricing in an over 80% chance of this further cut occurring. This represents a solidly hawkish consensus that more easing of monetary policy might be necessary to re-accelerate economic growth.
“Although inflation remains elevated, policymakers are slightly more focused on downside risks to the employment mandate,” noted economists at Bank of America. Most recent inflation figures have shown this down to a year-over-year rate of 3%. That’s a bit worse than economists had been projecting, but the focus will now turn to. This positive inflation result for September gives the Fed the green light to focus on improving the labour market by making rate cuts their priority.
Michael Feroli, chief US economist at JP Morgan, commented on the current economic climate, stating that the absence of official job market data could “significantly change perceptions of the labour market for better or worse.” This uncertainty underscores the predicament in which the Federal Reserve finds itself in making prudent policy during this continued shutdown.
The recent job losses and rising inflation have sparked fears regarding tariff-driven inflation, particularly following President Trump’s implementation of sweeping tariffs on major trading partners earlier this year. And our economic terrain is growing ever more foreboding. At the same time, policymakers are still trying to determine the effects of these tariffs and how to best promote job creation.