Federal Reserve on Wednesday reduced Benchmark interest rate by 0.25 percentage points, marking the second straight rate cut this year as the US economy suffers a sharp slowdown in hiring.
The Fed is cutting the federal funds rate — what banks charge each other for short-term loans — to between 3.75% and 4%, down from its previous range of 4% to 4.25%. The Fed cut interest rates by the same amount in September, its first cut since December 2024.
The central bank’s move to ease monetary policy aims to support economic growth by reducing borrowing costs and stimulating consumer spending and investment by companies. Although ongoing US government shutdown With the Department of Labor’s September jobs report delayed, other indicators point to a continued slowdown in hiring. For example, ADP’s National Employment Report showed private sector payrolls Shrink by 32,000 last month.
In its policy statement “Downside risks to employment have risen in recent months,” the Fed said on Wednesday.
The Fed’s so-called dual mandate requires monetary policymakers to keep inflation and unemployment low, with Fed Chairman Jerome Powell indicating last month that risks to the labor market were growing.
“By resuming its interest rate cutting cycle, the Fed is primarily responding to signs of weak labor demand,” Seema Shah, chief global strategist at Principle Asset Management, said in an email. “The apparent decline in the jobs market appears to have prompted a pre-emptive move to prevent further deterioration, and the September rate cut is likely to mark the beginning of a series of cuts.”
Shah added that she expects an additional cut of 0.25 percentage points at the Fed’s December 10 meeting. The Federal Open Market Committee, or FOMC, the committee that sets monetary policy for the Federal Reserve, is not scheduled to meet on interest rates in November.
Experts said the near-total blackout of government economic data during the shutdown could complicate the Fed’s decision-making process. Typically, Fed officials can rely on a range of official reports, from measures of employment growth to indicators of inflation, as they seek to determine the best course of policy.
“While today’s rate cuts and the overall direction of future policy remain relatively clear, guidance on the committee’s perspective on economic conditions is more necessary than ever,” Bankrate financial analyst Stephen Kates said in an email. “The prolonged government shutdown and ongoing tariff negotiations continue to create significant uncertainty in the immediate monetary policy outlook.”
Ten of the 12 members of the Federal Open Market Committee voted in favor of the quarter-point cut, with two members objecting. Fed Governor Stephen Meiran objected, favoring a 0.50 percentage point cut, as he did at the September meeting. Kansas City Fed President Jeffrey Schmid also objected, saying he would prefer not to change the interest rate.
Inflation battle
While the Fed is now focusing on weakness in the labor market, its battle against inflation is far from over. The Fed raised interest rates after consumer prices rose during the pandemic, with inflation reaching a 40-year high of 9.1% in June 2022.
Because higher interest rates make borrowing more expensive, businesses and consumers typically react by cutting back on spending, weakening demand throughout the economy and cooling inflation. Since mid-2022, inflation has eased to an annual rate of 3% as of September, although this is still above the Fed’s target of an annual rate of 2%.
While the broad tariffs imposed by the Trump administration are It started flowing through On consumer prices, the impact was less severe than economists expected earlier this year. Some companies bear some of the costs of customs duties, while others stockpile imports earlier in the year to get ahead of import duties.
“Although inflation remains above a comfortable level, the jobs market is holding on to signs of weakness, and their desire to further stimulate the economy will likely continue to outweigh inflation concerns,” said Steve Reich, chief economist at financial services firm TruStage.
