As the US economy took a step back in September, ADP last week recorded the loss of 32,000 jobs. In recognition of these alarming trends, the Federal Reserve acted. Specifically, they reduced the upper bound for their principal policy rate by 0.25 percentage points, establishing a new range of 3.75% to 4%. This decision comes amidst pressures from various economic indicators and political figures, particularly President Donald Trump, who has consistently urged Federal Reserve Chairman Jerome Powell to implement rate cuts.
The question is whether lawmakers expected this move as stimulating economic development to the tune of billions. They are optimistic that it will result in additional cuts to borrowing costs across the country. The Fed’s most recent decision was in line with what the market had anticipated. On Wednesday, investors showed a greater than 80% implied probability of a Fed cut by December, according to CME FedWatch data. This persistent forecast is indicative of an underlying conviction that despite the persistence of economic headwinds, we should expect a much more hawkish monetary stance.
This year’s US government shutdown has further piled on to these economic uncertainties. It has further delayed the release of the official monthly jobs report for the month of September. This shutdown has left central bankers with limited information, effectively “flying blind” regarding the current state of the job market. With the absence of deep data, it hinders the Fed from making fully informed decisions on their monetary policy.
Although the economy has lost more than 1.6 million jobs so far, inflation has begun to moderate. Consumer price inflation for September came in at 3% year-over-year, a tick down from economists’ expectations. As evidenced earlier this year, inflation fears spiked amid increased tariff threats. President Trump added insult to injury by rolling out sweeping tariffs on virtually all of our trading partners.
While a hard landing seems more likely, the Federal Reserve’s anticipated eventual rate cut signals a delicate balancing act between managing inflation and the risks to employment. Economists at Bank of America noted, “Although inflation remains elevated, policymakers are slightly more focused on downside risks to the employment mandate.” This view reinforces the Fed’s message that they remain focused on providing the conditions to foster job growth—despite continued inflationary pressures.
Against this economic backdrop, Powell’s four-year term as chair of the Federal Reserve expires next May. In fact, President Trump himself has reportedly dangled the prospect of announcing a replacement for Powell just in time for this year’s holiday season. This looming change in leadership could have an even greater impact on the direction of monetary policy in the months to come.
Wall Street is looking for a quarter-point cut at the Federal Reserve’s last meeting of the year in December. That’s why financial markets seem to be overreacting to everything new that’s happening. The ongoing relationship between positive employment trends and negative inflationary pressures is sure to remain at the forefront of economic forecasts and policy decisions.