The US Federal Reserve has taken another step to ease monetary policy by cutting interest rates amid growing concerns about a weakening labor market, even as inflation fears have diminished. On Wednesday, the central bank announced a 0.25 percentage point reduction in its key lending rate, lowering the target range to 3.75% to 4%. This move marks the Fed’s second rate cut since last December, signaling a shift in focus from combating inflation to supporting the labor market and broader economic growth.
The timing of the rate cut is notable, coming during an unusual period of uncertainty caused by the ongoing US government shutdown, which has been nearing its one-month mark. The shutdown has delayed the release of crucial official economic data, including the monthly jobs report, leaving Federal Reserve policymakers somewhat “flying blind” regarding the true state of the labor market. Economists have highlighted the challenges this data gap poses, as it complicates efforts to gauge the economy’s health and determine the appropriate pace and scale of future rate adjustments.
Despite this opacity, the Federal Reserve decided to move forward with the rate cut based on available information. The decision was not unanimous: two members of the Federal Open Market Committee (FOMC) dissented. Stephen Miran, who is on leave from his role as head of President Donald Trump’s Council of Economic Advisers, favored a more aggressive 0.5 percentage point cut, while Jeffrey Schmid, president of the Federal Reserve Bank of Kansas City, preferred to keep rates steady. These differing views underscore the uncertainty and debate within the Fed about the best path forward.
The rate cut brings the Fed’s target interest rate to its lowest level in three years, effectively lowering borrowing costs for consumers and businesses across the country. This move aims to stimulate economic activity by making credit more affordable, which, in theory, should support hiring and investment.
The impetus for restarting the rate-cutting cycle in September was a noticeable slowdown in job growth. The Fed’s latest policy statement reiterated that “job gains have slowed this year” and that the unemployment rate, which remained low through the summer, has “edged up” recently. Fed Chair Jerome Powell emphasized during his post-decision press conference that the labor market appears “less dynamic and somewhat softer” compared to earlier in the year, citing factors such as reduced immigration that may be contributing to this softness. However, Powell also stressed that the weakening in the job market does not seem to be accelerating rapidly.
The absence of official government data due to the shutdown has forced the Fed to rely on alternative sources to assess labor market conditions. Private-sector data, such as the payroll figures from ADP, have indicated a continuing trend of sluggish hiring, with the US economy reportedly losing 32,000 jobs in September. This trend contrasts with the generally strong labor market seen earlier in the year and has been a key factor in the Fed’s decision to lower interest rates.
On the inflation front, the Labor Department was still able to release September’s inflation data last week, showing a year-over-year increase of 3%. This figure was slightly lower than economists had expected and, importantly, remains above the Fed’s long-term target of 2%. However, the inflation reading was mild enough to allow policymakers to prioritize supporting the labor market through rate cuts without immediate concern about inflation overheating.
Earlier in the year, fears of tariff-driven inflation had dominated the economic debate, especially after President Trump imposed sweeping tariffs on many of the country’s largest trading partners. These tariffs were expected to push up prices on consumer goods. While tariffs have indeed contributed to some price increases, the September inflation data suggested that inflation excluding tariffs was closer to the Fed’s 2% target. Powell remarked that the central bank hopes tariffs will only result in one-time price increases for certain products rather than sustained inflationary pressure.
In addition to lowering interest rates, the Fed announced it will halt the shrinking of its balance sheet starting December 1. Over the past three years, the central bank has been gradually reducing its holdings of government debt and mortgage-backed securities, an effort known as “quantitative tightening” that followed large-scale asset purchases during the pandemic and previous financial crises. This unwinding process aimed to normalize the Fed’s balance sheet and tighten monetary conditions. However, concerns about financial market stress and the need to support the economy have led the Fed to pause this process.
Looking ahead, Wall Street had anticipated another 0.25 percentage point rate cut at the Fed’s final meeting of