The Federal Reserve trimmed its key federal-funds rate by 25 basis points, lowering the target range to 3.75%-4.00%. This marks the second straight meeting in which the Fed has eased policy this year, highlighting growing concern about the economic backdrop amid a U.S. government shutdown and faltering job-market signals.
Despite the cut, the vote was not unanimous. Two Fed officials dissented – one favouring a deeper 50-basis-point reduction and another preferring no change – underscoring divisions within the central bank on how to balance inflation and employment risks.
Why the Fed Acted
With key labour-market data delayed due to the shutdown, the Fed faced significant information gaps. Available indicators pointed to softer hiring and tighter labour supply, prompting policymakers to shift focus from price stability to employment risks. One official commented that the central bank’s biggest “single tool” must now manage both inflation and weak labour trends – an increasingly difficult mandate.
Persistent inflation remains a concern; the latest data show consumer-price increases of around 3% year-on-year. Yet the Fed appears more worried about growth cooling, given that retail sales, manufacturing output and hiring all exhibited signs of deceleration. The rate cut reflects the Fed’s pivot to a cautious easing stance while keeping future options open.
Market Reaction and Policy Outlook
Investors are now pricing in one or two additional rate cuts this year, yet the Fed’s guidance remains cautious. Markets will closely monitor upcoming data for help: the next labour-market report, inflation reads and GDP figures will all influence the Fed’s decision-making.
Key risks include a rebound in inflation – especially if wage pressures resurface or a resurgence of growth that forces the Fed to pause. Meanwhile, the ongoing shutdown continues to hamper data collection, mudding policy signals. Stakeholders will also pay attention to forward guidance for quantitative-easing operations and the balance-sheet trajectory.
As previously covered, the current setting illustrates a shift in central-bank strategy: from inflation-fighting to growth-supportive, but with persistent uncertainty and no clear path ahead.
