Over the past several months, the Federal Reserve has undergone an extraordinary policy transformation. They’ve gone from increasing interest rates as aggressively as possible to being much more data-dependent on this last increase. We expect the first cut in late October. Beyond that, there will be a wait at later meetings, but all signs point to another possible cut happening at the next December meeting. The central bank interprets obfuscating economic data. It needs to walk a fine line of addressing inflation worries and still create favorable conditions for growth.
This time, the Federal Reserve acted on Halloween and cut the federal funds rate by 25 bps. This decrease brought the federal funds rate down to a target range of 3.75 to 4.00 percent. This decision represented a significant shift in direction as lawmakers reacted to developing economic data and state of the labor market. In terms of further cuts, all the evidence suggests a 25 basis points cut most likely at the next meeting on December 9-10. In Washington, officials are increasingly taking a hard look at how past monetary policies have affected the economy.
Recent Economic Indicators
Despite the Fed’s recent actions, core inflation remains above the central bank’s target of 2 percent. This underlying inflationary pressure is making choices harder for Federal Reserve officials. John Williams, President of the New York Federal Reserve, sparked a great deal of interest with his recent comments. He suggested that the Fed has further “room” to reduce borrowing costs. This sentiment deserves some serious skepticism. Thus, it has been disappointing and puzzling to see several voting members of the committee begin raising alarm bells as inflation persists at an uncomfortably high level.
The state of the labor market adds more confusion to the mix. Last month’s employment situation reports show private employers have lost more than 30,000 jobs, hitting small businesses the hardest. This new trend has serious implications for our economic stability. It’s unclear if deeper cuts would create new jobs or just make it harsher on challenges already facing workers. With economic conditions still highly uncertain, all of this is setting up what looks to be a very divided FOMC in December. Some members will almost certainly warn against too much haste, while others will argue for further easing.
A Divided Federal Reserve
It will be essential for the December meeting to acknowledge and begin to communicate the growing divergence among Federal Reserve officials about what path lies ahead. Indeed, some members support a rate cut, calling it a warranted tactical move to respond to softening economic conditions. Others are still a bit gun shy on this strategy. The deliberations will almost certainly lead to public disagreement among committee members, setting the stage for a split position within the Fed.
Here’s what you need to know Another rate cut is all but a foregone conclusion. That doesn’t imply a rapid easing cycle is beginning. Rather, the Federal Reserve is likely to be more data-dependent, weighing the economic indicators one meeting at a time. We know that for each individual decision going forward, we’ll have a much better understanding of the data available. Second, they are dodging on the commitment to multiple years of cuts.
The Federal Reserve’s recent change in tone is a welcome change from the hawkish pushback we’ve heard in recent weeks. Now, there seems to be a greater willingness to consider adjustments as evolving economic conditions demand flexibility in policy responses. The disruptions from the recent U.S. government shutdown were real and unfortunate. What’s worse, a slew of important economic indicators were delayed just after the October rate cut, adding to the confusion for decisionmakers.
Looking Ahead
The Federal Reserve no doubt is already preparing for its December meeting. DOT officials will probably go through a very conservative, cautious, and skeptical evaluation period potentially stretching into early 2026. This central bank understands that staying attuned to shifting economic realities is key. They know too that any rate cuts will need to be tuned and monitored to avoid negative spillovers.