CNN
The Federal Reserve on Wednesday lowered interest rates for the second time this year in a continued bid to prevent unemployment from surging.
But another rate cut at the next meeting in December “is not a forgone conclusion,” Fed Chair Jerome Powell said in a news conference, adding there were “strongly differing views” among policymakers on how to move forward.
Fed officials voted for another quarter-point rate cut, lowering their benchmark lending rate to a range between 3.75% and 4%, the lowest in three years.
Wednesday’s 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 President Donald Trump’s sweeping policies on trade, immigration and spending are affecting the US economy.
To make matters more complicated, it was also the first time officials have set monetary policy while lacking an entire month of crucial government employment figures in the modern era.
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 have recently announced tens of thousands of layoffs.
The problem: A prolonged government shutdown could stand in the way of further rate cuts, especially with some officials such as Schmid concerned about persistent inflation pressures in the economy.
“What do you do if you’re driving in the fog? You slow down,” Powell said.
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Powell on the Fed flying blind
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. Powell said as much when taking reporters’ questions.
“There’s just no story over the last four weeks, it’s kind of stable,” he said. “You don’t see anything that says that the job market, or really any part of the economy, is making a significant deterioration.”
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 doesn’t immediately translate to higher unemployment. Workers who’ve been laid off sometimes receive generous severance packages.
Powell mentioned that private data cannot replace government figures, which are widely known as the “gold standard” of measuring the world’s largest economy. And the persistent absence of those figures could put future rate cuts at risk.
“There’s a possibility that it would make sense to be more cautious,” Powell said.
Powell on the lingering question of tariff inflation
The inflation situation also remains murky, Powell said.
So far, inflation hasn’t 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 late Wednesday US time for a wide-ranging discussion in South Korea, which will likely include a potential US-China trade deal.
Powell reiterated that there’s a “reasonable” expectation that tariff inflation may be short lived, which helped pave the way for September’s rate cut. But that would also remain unclear if the October CPI, which is scheduled for November 13, isn’t released because the shutdown persisted. Fed officials normally look to the Personal Consumption Expenditures price index, widely known as their preferred inflation measure, but that figure also hasn’t been released due to the shutdown.
Powell said once the tariffs have kicked in, the hope is that “they stop generating inflation,” reflecting a one-off effect.
“This is how we believe and hope that it will work out,” Powell said.
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, but is now around $6.6 trillion after a careful effort to reverse the stimulus it introduced into the economy during the Great Recession and the Covid-19 pandemic. It’s a tool that works in the background while the Fed’s key interest rate does much of the heavy lifting to achieve its macroeconomic goals. Officials have judged that the balance sheet is close to a more normal state.
Here are Wall Street’s reactions to the Fed chair’s latest comments.
- Chris Zaccarelli, chief investment officer at Northlight Asset Management: “This is a great example of the market being forward-looking because the immediate news – a rate cut and the end of quantitative tightening (and the beginning of automatic buying of bonds) – are both positives for stocks and bonds, however, markets already expected this and were negatively surprised that future cuts might be taken off the table.”
- Jack McIntyre, portfolio manager at Brandywine Global: “At a time when it’s flying with only one eye open, the Fed decided that the softening in the labor market is a bigger concern than the stickiness of inflation. This stance makes sense given that labor statistics are lagging economic indicators and monetary policy works with a lag. So for October, the Fed wanted to err on the side of a further rate cut. What makes less sense is the odd range of dissents. Miran’s call for a larger cut could be dismissed as too dovish. But Schmid’s call for no cut combined with Powell’s comments during the press conference, in which he said he wants to put some daylight between the Fed’s view of potential future rate cuts with the market’s view for December, can’t be easily dismissed. This divergence means less complacency in financial markets, more volatility, and more two-way flows.”
- Jeffrey Roach, chief economist at LPL Financial: “The downside risks within the job market will likely ensure the Fed will continue to cut rates in December and throughout the next year. See forecasts below.”
- Ryan Detrick, chief market strategist at Carson Group: “The Fed didn’t rock the boat and cut interest rates by 0.25%, as was widely expected, while also leaving the door wide open for another cut in December. Chairman Powell acknowledged the potential issues in inflation, but a weakening labor market outweighed those worries and allowed for this cut and likely future cuts.”
- Michael Pearce, deputy chief US economist at Oxford Economics: “The decision to lower interest rates by 25bps in October was never in doubt, but the unexpected hawkish dissent from a regional Fed president highlights that future moves are becoming more contentious. We expect the Fed to slow the pace of cuts from here. Our view is predicated on a stabilization in labor market conditions, which is a difficult call amid the dearth of official data.”