On Wednesday, the US Federal Reserve, as increasingly expected, announced a quarter-point cut in interest rates. This amendment marks the third cut this year. According to recent economic indicators, inflation has risen modestly, as has unemployment. All of this makes us wonder what US economy, and economic policy, should look like going forward.
Inflation spiked in the last few months, climbing from 2.3% in April to 3% in September. At the same time, unemployment increased as well, rising from 4% in January to 4.4% in September. The Federal Reserve’s latest move to lower rates aims to address these economic shifts amid prevailing uncertainties regarding trade policies and labor market dynamics.
At its October meeting, the Federal Reserve voted nine to three. So, they chose to raise their target range for short-term interest rates to 3.5%—3.75%. This divisive decision is unusual, since the committee usually makes these controversial decisions by consensus. The minutes from that meeting highlighted “strongly differing views” among policymakers about how best to proceed in the upcoming December meeting.
Federal Reserve Chairman Jerome Powell remarked, “There is no risk-free path for policy as we navigate this tension between our employment and inflation goals.” His remarks illustrate the confusion that exists in our current economic environment. They lay bare the shifting sands the Federal Reserve must navigate to craft effective monetary policy.
During the discussion, Tom Barkin, president of the Richmond Fed, recognized the challenge of building agreement among policymakers. “Without compelling data, it’s actually hard to get people who have pre-existing perspectives to all come to a consensus,” he stated. Barkin pointed out that the committee is asking these key questions and having important discussions. We hope these conversations will encourage more discussions about what is the right path forward.
Powell to emphasize that officials are doing these rate cuts very carefully. They lack the confidence that prices are really going down. He said the Federal Reserve’s “dot plot” projections for 2024 show an unwillingness to do a lot more lowering of rates.
Earlier in the year, Federal Reserve officials expressed a desire to observe how President Donald Trump’s tariffs would influence prices before making any significant changes to interest rates. Continuing confusion regarding the status of tariffs contributes to an unsettled economic environment. The effects of these labor force changes, thanks to Trump’s immigration policies and massive cuts to government, only further our concern.
The Federal Reserve could use some help addressing these concerns. To make things even more confusing, Powell’s term as chair is due to expire in May, adding further uncertainty. Kevin Hassett, the former top economic advisor to Trump, is reportedly under consideration by Trump to replace Powell. Hassett’s return to the White House is as director of the National Economic Council. Hassett answered on Fox News prompting Trump to make his final pledge in the coming weeks.