The Federal Reserve cut interest rates by a quarter of a percentage point on Wednesday for its second consecutive meeting, seeking to steady a weakening labor market, while a month-long government shutdown has clouded its view of the economy.
Investors will be listening for clues from Chair Jerome H. Powell on how much further and how quickly policymakers may cut over the coming months, when he speaks at 2:30 p.m. Eastern time.
After keeping rates steady since January to assess the impact of President Donald Trump’s trade and immigration policies, the Fed cut rates in September and signaled cautiously that more reductions could be coming, even as inflation remains persistently high. However, Fed officials are increasingly worried about the state of the labor market. Major companies such as Amazon and UPS are among those that announced mass layoffs this week, and the federal shutdown continues to weigh on the labor market with trickle down effects for federal contractors.
President Donald Trump has pushed for dramatically lower rates to juice the economy and to help finance cheaper borrowing costs for the United States. He has repeatedly attacked Powell and is attempting to fire another sitting Fed governor. Speaking in South Korea on Wednesday, Trump again derided Powell for perceived delays in cutting rates, referring to the Fed chief as “too late.”
What comes next may not be clear. Markets anticipate a third cut in December and a high likelihood of yet another cut in January, but Fed policymakers may opt for a more cautious approach as they confront an economy showing signs of mild stagflation — stubbornly elevated inflation paired with a weakened job market.
Minutes of September’s meeting suggest Fed officials are increasingly divided on how to proceed: A few questioned whether a rate cut was necessary at the last meeting and could have supported keeping rates steady instead. One favored a series of steep cuts. Powell has said there is no “risk-free path.”
The longer the shutdown goes on, the harder the Fed’s job will get, with an increasing risk of misjudging an economy that is flashing mixed signals. The central bank could be operating without official data on jobs, inflation, and growth when it meets for the last time this year in December. Earlier this month, the Trump administration recalled a small team of furloughed workers to complete the latest consumer price inde,x but said a continued shutdown probably would prevent the government from releasing an inflation report for October.
That could leave Powell and the Fed with the delicate task of relying more heavily on private-sector data as well as reports from the 12 regional Fed banks that maintain contacts across the country to help determine the health of the economy.
Trump’s repeated calls for a steep rate cuts are unlikely to gain traction unless new data shows a sharp weakening in the job market — the kind of evidence that is now out of reach.
Normally, a softening labor market would trigger the Fed to cut rates to support hiring and the overall economy. Unemployment rose to 4.3 percent in August — the highest rate since October 2021 — while job growth has stalled, with just 22,000 positions added in August, far below expectations.
But inflation remains at an annualized rate of about 3 percent, above the Fed’s 2 percent target, fueled partly by Trump’s tariffs on imported goods that have raised costs for manufacturers and consumers. Elevated inflation could limit the ability of the Fed to cut, or make officials reluctant to cut by much beyond Wednesday’s rate reduction, for fear of juicing the economy in a way that spurs more inflation.
A key question revolves around whether firmer inflation stemming from tariffs will prove temporary or whether cost increases will become more entrenched. When households and businesses expect inflation to persist, those expectations can become self-fulfilling as workers demand raises and companies raise prices accordingly. So far, there’s little evidence of that happening.
Even as Powell insists on independence, the Fed has quietly adjusted to the new political climate, as it seeks to align its policies with the rest of the government. The Fed has shelved diversity and climate-related initiatives announced during the Biden administration, ordered a 10 percent cut in staff, and required employees to return to the office full-time.
In return, it has received little reprieve. Trump has installed his own Council of Economic Advisers chairman as a Fed governor, albeit on leave from the White House, and continues to press for deeper rate cuts.
Meanwhile, Trump is seeking to oust Lisa Cook, a Biden-appointed Fed governor, over allegations she engaged in mortgage fraud. She denies the accusations and has sued to remain on the Fed board while she challenges her firing, the first such attempted dismissal of a sitting governor in the Fed’s 111-year history. The Supreme Court has agreed to weigh in but has deferred a decision on the matter until after oral arguments in January.
This is a comparison of Wednesday’s Federal Open Market Committee statement with the one issued after the Fed’s previous policymaking meeting in September.
Text removed from the September statement is in red with a horizontal line through the middle.
Text appearing for the first time in the new statement is in red and underlined.
Black text appears in both statements
The Federal Reserve cut interest rates by a quarter point on Wednesday for the second consecutive meeting, lowering the benchmark rate to 3.75%-4%.
But the bigger story may be what happened behind the scenes.
The Unusual Split:
The decision passed 10-2, with dissenters pulling in opposite directions:
→ Governor Stephen Miran wanted a half-point cut (his second consecutive dissent)
→ Kansas City Fed President Jeffrey Schmid wanted no cut at all
Two dissents are unusual, especially pulling in different directions. I do expect more dissents in the coming months with potential divisions on different sides of their dual mandates.
The Data Problem:
The Fed made this decision essentially flying blind. Due to the government shutdown, economic data collection has been suspended, no jobs reports, no retail sales,and no key macro indicators beyond last week's CPI release.
The post-meeting statement acknowledged this uncertainty, noting that "available indicators suggest economic activity has been expanding at a moderate pace" while flagging that "downside risks to employment rose in recent months."
Powell's Shift:
Chair Jerome Powell noted that the risk dynamics have changed. Previously, the concern was higher inflation. Since July, there's been increasing downside risk to the labor market.
However, Powell made clear that a December cut is not a foregone conclusion; the Fed will remain data-dependent.
The Balance Sheet Move:
The Fed also announced it will end quantitative tightening on December 1, stopping the reduction of its $6.6 trillion balance sheet. The program had already cut roughly $2.3 trillion in holdings since its peak near $9 trillion during Covid.
What Supports Another Cut:
A soft inflation reading, anchored expectations, and private data evidence of cooling labor demand support a cautious easing approach. If current conditions hold, another quarter-point cut at the December meeting seems plausible.
The Investment View:
These conditions can be bullish for stocks, but a lot is already priced in. Markets are forward-looking, and much of the easing cycle may already be reflected in current valuations.
Bottom Line:
Expect more dissents ahead as the Fed's dual mandate pulls policymakers in opposite directions. The unity that carried the Fed through Covid and the inflation surge is fracturing.
A divided Fed navigating conflicting signals with limited data creates uncertainty that could matter more than the cuts themselves.
Is the Fed striking the right balance, or are they moving too cautiously given labor market risks?