Implications of the Fed rate cut

The Federal Reserve lowered interest rates by 25 bps for the second time this year in a continued bid to prevent unemployment from surging and get the economy going again. But another rate cut at the next meeting on December 9-10 is not a forgone conclusion, Fed Chair Jerome Powell said, adding there were strongly differing views among policymakers on how to move forward. Fed officials voted for cut, lowering their benchmark lending rate to a range between 3.75% and 4%, the lowest in three years.

The decision drew two dissents, one from Fed Governor Stephen Miran, who backed a larger, half-point cut, and another from Kansas City Fed President Jeffrey Schmid, who preferred to hold borrowing costs steady. It is the first time since 2019 that there were dueling dissents, both calling for easier and tighter policy, underscoring the heated debate among officials over how Trump’s sweeping policies on trade, immigration and spending are affecting the US economy. It also shows that the Fed does not really know how to react and act and they are just following available data and make the best possible decision based on that. Trump had mentioned that he wanted the Fed to cut the rate by 100 bps to kick-start the economy, but the Fed is more conservative and cautious. Besides, they are independent from the president and base their decisions on available facts. To make matters more complicated, it was the first time officials have set monetary policy while lacking an entire month of crucial government employment figures in the modern era. This is due to the ongoing government shutdown.

Central bankers began to lower rates last month after data through August showed employers were adding jobs at the weakest pace since 2010. Major companies such as Amazon and Target and major banks have recently announced tens of thousands of layoffs. Powell made it clear that the Fed doesn’t have the full picture of the economy’s health without government data. The Fed’s latest policy statement noted that more recent indicators were consistent with earlier data, before the shutdown, that showed weak hiring and slightly higher unemployment.

Data from payroll software provider ADP released this week showed that hiring picked up in September, but remained weak. And while there have been prominent layoff announcements in recent weeks, that does not immediately translate to higher unemployment. Powell mentioned that private data cannot replace government figures, which are widely known as the gold standard of measuring the economy.

So far, inflation has not surged due to new tariffs that have gone into effect, according to the latest Consumer Price Index, largely thanks to businesses managing higher costs without passing the buck to consumers. The Fed chief said that officials expect that there will be some additional increased inflation because it takes a while for tariffs to work their way through the production chain and, finally, get to consumers. Economists widely expect tariff inflation to pick up as well, especially if Trump makes good on his recent tariff threats.

The September CPI, which was released last week despite the shutdown, for Social Security’s cost-of-living adjustment, was cooler than economists had predicted, but it showed persistent price pressures that could worsen because of Trump’s tariffs. Trump is meeting with his Chinese counterpart Xi Jingping this week for a wide-ranging discussion in South Korea, which will likely include a potential U.S.-China trade deal.

One matter potentially impacting the Fed December meeting is the October CPI report, which is scheduled for November 13. It might not get released due to the shutdown. Fed officials normally also look to the Personal Consumption Expenditures price index, widely known as their preferred inflation measure, but that figure also has not been released due to the shutdown.

In a separate decision, policymakers announced the end of a three-year process to shrink the size of their enormous portfolio by December 1. The Fed’s portfolio, or balance sheet, reached about $9 trillion in mid-2022, and is now around $6.6 trillion after an effort to reverse the stimulus it introduced into the economy during the Covid-19 pandemic. Officials have judged that the balance sheet is close to a more normal state.

It seems prudent to continue rate cuts to get the economy moving faster, accelerate hiring and to lower credit costs for the American population. As so much is tied to the interest rate, like mortgages for the housing market and credit card rate for consumption, it is crucial that the Fed continues with the current path of cutting. The Fed has in the past been notoriously slow to react, letting inflation soar to more than 9% and been overly careful with its decisions. It is time for big, bold moves to get both hiring and consumption moving.