To address those issues, the Federal Reserve has once again lowered the target for its key lending rate. This drop is by 0.25 percentage points. The Fed’s new target range is now 3.75% to 4%. This decision is in direct response to growing concerns over the US labor market and the state of the economy in general. The central bank is using this war chest to stimulate growth and lower borrowing costs across the country.
This year, the US economy added just 32,000 jobs in September, according to data from payroll processing firm ADP. The current federal government shutdown prevents us from accessing key economic data. As such, central bankers are undergoing what amounts to an unprecedented experience of being “flying blind” regarding the labor market’s true state since their last meeting. The unknowns have upped the stakes for Fed Chair Jerome Powell. To add to this, President Trump has been especially loud—calling on him time and again to cut interest rates to help spur economic activity.
Almost universally, economists expected this rate cut to trigger more cuts. They had wanted to use it to lower borrowing costs even more and increase consumer spending. Wall Street analysts are firmly betting on at least a quarter-point cut come December in the Fed’s last meeting of the year. It’s no longer a surprise or a mystery to investors, who have already priced in an over 80% chance of this, per CME FedWatch.
“Although inflation remains elevated, policymakers are slightly more focused on downside risks to the employment mandate.” – Economists at Bank of America
Even with these pressures, inflation numbers from September reported a 3% year-over-year increase, even less than what economists were expecting. The softer than expected inflation report will give the Federal Reserve more room. Now they can target improving the labor market by reducing interest rates, rather than solely aiming to tame inflation.
Over this period, the backdrop of tariff-driven inflation has impacted Fed monetary policy deliberations. Earlier this year, President Trump went and did it—imposed sweeping tariffs on a broad swath of the United States’ largest trading partners. Many viewed this decision as a response to growing inflationary pressures. After inflation data seemed to stabilize and become less alarming over the past few months, the Fed is shifting its focus back toward employment.
With the federal government still shut down, the official monthly jobs report for September has been delayed. As such, the level of uncertainty is still exceedingly high. This lack of real-time, forward-looking data makes it needlessly difficult for the Fed to understand current economic conditions and set optimal monetary policy. This state of affairs has highlighted a new, tricky tightrope for central bankers to walk as they address ongoing economic uncertainty.
In recent months, President Trump has greatly increased the pressure on Powell. He suggested that he would announce a replacement for Powell before his own term ends next May. This very much contested and potential change in leadership at the Fed may have profound consequences on what US monetary policy will look like in the future.