The Federal Reserve on Wednesday cut the interest rate by 0.25% for the second time this year. The current interest rate is now 3.75% – 4.00%, a range that many investors had predicted, and the lowest level in three years.
At September’s meeting, Federal Reserve Chair Jerome Powell signaled that more rate cuts could be coming. Today, he shared a different message, saying, “In the Committee’s discussions, there were strongly differing views on how to proceed in December. A further reduction in policy rate at the December meeting is not a foregone conclusion — far from it. Policy is not on a preset course.”
There were two dissents from today’s 0.25% rate cut decision. One Fed Governor voted for 0.50% and another voted for no cut at all.
During the Q&A portion of Powell’s address, he added that December’s decision will be complicated due to strong economic activity and growth forecasts contrasted by a cooling labor market.
The Federal Reserve continues to walk a tightrope, balancing its dual mandate of targeting inflation at 2% while seeking to reduce unemployment. Recent inflation data showed inflation at 3.0%, slightly above target and the highest since January.
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Powell addressed higher tariffs, saying that they are raising the prices of a few categories of goods, but also noted that a reasonable base case regarding tariffs is that “the effects on inflation will be relatively short-lived as a one-time shift in the price level.”
The Federal Reserve closely follows the Producer Price Index (PPI) to see whether companies are absorbing higher tariff costs or passing them along to consumers. Recent PPI reports indicated that so far, businesses have largely kept those costs from reaching consumers.
However, due to the government shutdown, the Federal Reserve did not receive September’s PPI Report.
“The public and private sector data that has remained available will suggest that the outlook for employment and inflation has not changed much since September,” stated Powell, addressing the fact that the government shutdown has resulted in the Fed missing critical government data.
Along with the delay in data, Powell noted that the government shutdown will weigh on economic activity. Powell expects these effects to reverse once the government reopens.
Expanding on employment, Powell stated, “Job gains have slowed this year, and the unemployment rate has edged up … labor demand has clearly softened.”
This week alone, Amazon, Target, General Motors, UPS, Chegg, and other large companies have announced mass layoffs citing AI, economic uncertainty, and global tensions. The first signs of these layoffs could appear in spikes in initial jobless claims, which document the number of individuals who file for unemployment insurance benefits. However, this report will be delayed due to the government shutdown, as the Department of Labor has had to furlough employees who produce the report.
Despite concerns of a weakening labor market and potential persistent inflation, Powell eased concerns that the economy is in an AI bubble.
“If you go back to the 90s and dot.com, these were ideas rather than companies, so there was a clear bubble there. Today, companies have business models and earnings, so it’s really a different thing,” Powell said.
