Fed cuts rates to lowest level since 2022 but casts doubt on December move
- The San Juan Daily Star
- 15 hours ago
- 4 min read
By COLBY SMITH
The Federal Reserve cut interest rates on Wednesday for a second time this year, despite officials having only a partial view of how the economy is faring because of the government shutdown.
The central bank voted to lower borrowing costs by a quarter of a percentage point as the lapse in funding for the government stretched into its fifth week. Until lawmakers reach a deal, the Bureau of Labor Statistics and other agencies have stopped collecting, analyzing and publishing official statistics tracking the jobs market, consumer prices, spending and a range of other metrics.
Wednesday’s decision brought interest rates below 4% for the first time since late 2022. But it was a divisive vote, with two officials dissenting for different reasons. Stephen I. Miran, the newest member of the Fed’s Board of Governors, voted for a larger, half-point reduction, like he did in September. Jeffrey R. Schmid, president of the Federal Reserve Bank of Kansas City, wanted the Fed to instead hold interest rates steady at the previous level of 4% to 4.25%. This is the first time Fed officials have dissented in opposite directions since September 2019, when the committee voted to cut rates by a quarter point.
Wednesday’s split underscores the challenge the Fed faces going forward as it looks toward its next meeting, in December, and whether to cut a third time this year, as most officials had previously forecast.
Jerome Powell, the Fed’s chair, said that there were “strongly differing views about how to proceed in December” and that a cut was “far from” a foregone conclusion.
“We haven’t made a decision about December,” Powell said during a news conference after the decision. The Fed’s internal divisions stem from not only divergent views surrounding the economic outlook but also divergent risk tolerances around allowing the labor market to weaken or inflation to stay elevated.
Powell said that if the labor market were to stabilize at current levels or even accelerate, that “would certainly play into our decisions going forward.”
He also stressed that a lack of official data as a result of the shutdown could potentially impact the Fed’s decision in December, saying that “if there is a high level of uncertainty, then that could be an argument in favor of caution about moving.”
“What do you do if you are driving in the fog? You slow down,” he later added.
Investors now see a roughly two-thirds chance of a rate cut in December, based on probabilities derived from interest rate futures markets. The two-year Treasury yield, which is sensitive to changes in interest rate expectations, rose 0.1 percentage point, its largest move higher since June.
The government data drought comes at a precarious moment for the Fed, which finds itself in an uncomfortable position now that its goals of keeping consumer prices stable and employment strong are in conflict with each other. Powell reiterated Wednesday that there was “no risk-free path,” with the potential for inflation to stay elevated and the labor market to weaken depending on how quickly the central bank lowered borrowing costs.
Typically, the Fed cues off the incoming official data to help justify its interest-rate decisions, while also citing alternative measures and surveys related to economic activity. But the shutdown has effectively created a data blackout for the Fed, at least from government sources. The Bureau of Labor Statistics released the consumer price index report for September over a week late, on Friday, in order to meet a deadline for Social Security cost-of-living adjustments. But that is likely to be the last major data release from the agency for a while.
The White House recently warned that the CPI report for October might not be published since data for the month was not being collected given the shutdown. September’s job report and all subsequent monthly releases have also been indefinitely delayed.
The Fed’s decision to lower interest rates again on Wednesday reflects the central bank’s belief that it can afford to focus on the risks confronting the labor market and take steps to shore it up even though inflation is moving away from its 2% target.
In its policy statement, the Fed seemed to adopt a rosier view of economic activity but stressed that the labor market remained vulnerable. While it noted that the economy was “expanding at a moderate pace” and that the unemployment rate was still low, it stressed that “downside risks to employment rose in recent months.”
Before the shutdown, monthly jobs growth had slowed sharply and the unemployment rate had edged up. Some companies, like Amazon, have announced big layoffs, and the concern is that more will follow in a bid to cut costs. Powell said Wednesday that the Fed was monitoring those announcements closely, although he noted that weekly claims for unemployment benefits overall remained low. The labor market, he said, was “less dynamic and somewhat softer.”
While part of the pullback reflects a shift in demand for new hires, President Donald Trump’s immigration restrictions have also reduced the number of workers in the labor force.
The government shutdown itself represents a new risk to the economy, with federal workers now without pay, and access to food subsidies and other government assistance programs days away from being cut off. Economic activity is likely to rebound, though, once the government reopened, Powell said.