On Wednesday, the Federal Reserve reduced its key interest rate by 0.25%, a move that was largely expected and occurred amidst a growing lack of economic data, a softening job market, and persistent political demands from President Donald Trump.
TL;DR
- The Federal Reserve cut its key interest rate by 0.25%, lowering it to 3.75%-4.0%.
- This decision occurred amidst a lack of economic data due to a government shutdown and ADP ceasing data provision.
- Fed Chair Jerome Powell cited rising downside risks to employment as a key factor in the rate cut.
- President Donald Trump criticized the Fed and Powell, calling him "incompetent."
The Fed's policy rate is now approximately 3.75% to 4.0%, the lowest it's been in three years, and signifies the second reduction since Trump resumed office. This action was anticipated by markets, with CME's FedWatch tool indicating a virtually certain 25-basis-point cut before the meeting.
In its statement, the Federal Open Market Committee said, “Economic activity has been expanding at a moderate pace,” but acknowledged that job gains have slowed, and the unemployment rate has edged higher, even if it “remains low.” Inflation, it noted, “has moved up since earlier in the year and remains somewhat elevated.”
The Fed indicated it's still pursuing “maximum employment and inflation at the rate of 2% over the longer run,” and characterized the economic outlook's uncertainty as “elevated.” The committee determined that “downside risks to employment rose in recent months,” leading to the quarter-point reduction and the choice to halt the decrease of its securities holdings by December 1, suggesting an early move from tightening to a supportive stance.
The decision to reduce rates was supported by ten members, among them Chair Jerome Powell and Vice Chair John Williams. Two individuals opposed the move: Stephen Miran, a Trump appointee who favored a more accommodating, larger 0.5% reduction, and Jeffrey Schmid, president of the Kansas City Fed, who advocated for maintaining the current rate.
Balancing act
The Fed is in an awkward balancing act between the two halves of its dual mandate: keeping prices stable while sustaining employment. There’s “no risk-free path,” Powell has emphasized repeatedly.
This is due to inflation may be cooling on paper,, yet officials warn it remains higher than the Fed's 2% objective, and that the recent slowdown is primarily due to a deceleration in price increases, not actual decreases. Furthermore, experts have indicated that they anticipate inflation to increase in the final quarter of the year, as businesses will have to transfer higher expenses from tariffs to their customers.
At the same time, Powell has often said that the “downside risks to employment have risen,” meaning that the labor market is more of a concern to him than inflation. Powell has described the current jobs market as a “low-hire, low-fire” environment, where firms are reluctant to expand payrolls but equally hesitant to lay people off.
‘Flying blind’
Powell is trying to manage rising unemployment risks without access to the very data that would normally guide those decisions. For the first time in the modern history of the Federal Open Market Committee, the Fed acted without access to the monthly jobs report, which is especially critical given that the job market is “sputtering,” Moody’s Analytics chief economist Mark Zandi wrote on X.
The continuing government shutdown has halted has halted the publication of important data, including nonfarm payroll figures and consumer expenditure reports. Furthermore, in a surprising setback, payroll service ADP ceased providing its private employment figures to the Federal Reserve in August. This action has left Fed economists without a resource that former Bureau of Labor Statistics commissioner Erica Groshen described as “an essential real-time window” for understanding the job market.
“It’s very concerning,” Groshen told Coins2Day, adding that she worried that the Fed was “flying blind.”
“If policymakers build systems around data that can vanish overnight, that’s a real vulnerability for economic governance,” the economist explained.
However, there was one hint of light in the data: Bureau of Labor Statistics employees were brought back in order to deliver the inflation report, which showed the rate cooling to 3% in September. The figures, more than a week late, showed that price pressures are easing even as Trump’s new tariffs on goods from China, Brazil, and others ripple through the economy. Core inflation, which excludes volatile food and energy prices, rose 3% year over year, the slowest pace since early spring.
Looking ahead to Powell’s speech
Numerous analysts wrote in notes to clients that, given the data blackout, they anticipate Powell will concentrate more heavily on general economic trends during his press conference that follows the decision.
This morning, Deutsche Bank's Jim Reid noted: “With the U.S. Government shutdown now in its fifth week, our economists anticipate that Chair Powell’s press conference will pivot away from economic data—given its scarcity—and instead focus on balance sheet policy, the policy framework review, and financial stability.”
UBS chief economist Paul Donovan also noted that “market interest will be focused on the spectrum of views, the tone of the press conference, and (inevitably) speculation about Powell’s successor.”
Trump has already inflamed that speculation. Speaking in Tokyo on Tuesday, he mocked the Fed chair as “Jerome ‘Too Late’ Powell,” drawing laughter from a room of executives.
“We have an incompetent head of the Fed,” Trump said. “But he’ll be gone soon, and we’ll get somebody new.”
Powell’s term expires in May.