The Federal Reserve delivered its second consecutive rate cut, lowering the benchmark short-term interest rate by a quarter-point to a range of 3.75%–4%, the lowest level in three years. The move, aimed at cushioning the economy from a slowing labor market, comes as Chair Jerome Powell cautioned markets against assuming further cuts are inevitable.
“Far from it,” Powell said at a post-meeting news conference, pushing back on expectations of a December reduction.
The Rate Cut and Asset Portfolio Adjustment
The Fed’s decision, approved 10-2, reflected ongoing debates within the committee. Kansas City Fed President Jeffrey Schmid voted against any change, while Governor Stephen Miran wanted a larger, half-point cut.
In addition, the central bank announced it will halt the runoff of its $6.6 trillion asset portfolio on Dec. 1. Treasury holdings will now be replaced with short-term bills, while mortgage-backed securities will continue to mature without replacement. This marks the end of the Fed’s 3½-year campaign to unwind pandemic-era stimulus passively.
A Data Blackout Complicates Policy
Powell and other officials face heightened uncertainty due to the government shutdown, which has paused key economic reports. Without up-to-date labor-market data, officials cannot accurately gauge whether the economy is cooling enough to justify further easing.
“They haven’t learned that much since September, and that leaves them presumably closer to where they were in September, but with wider uncertainty bands around it,” said William English, former senior Fed adviser.
The lack of information makes it harder to reconcile differing opinions within the Fed. Some officials worry about inflation remaining above the 2% target, while others are more concerned about slowing demand in rate-sensitive sectors like housing and small business spending.
Labor Market Slowdown Drives Debate
Recent reports show the economy added around 29,000 jobs per month over the three months through August, down sharply from 82,000 a year earlier. Officials are trying to determine whether this slowdown reflects weaker labor demand or fewer people entering the workforce, influenced in part by immigration policy changes.
“Are they really adjusting their thinking to the idea that 50,000 jobs a month would be perfectly fine? I don’t know that everyone has really adjusted to that,” said James Bullard, former St. Louis Fed president.
While inflation has edged up to nearly 3% after broad-based declines in prior years, the labor market remains central to Fed decision-making. Policymakers are balancing the risk of cutting rates too much — which could overheat the economy — against the potential for insufficient support if the slowdown deepens.
What Comes Next
Markets have largely priced in a December rate cut, but Powell emphasized there is no guarantee. With mixed signals on jobs, spending, and inflation, the Fed faces a delicate balancing act: continue easing to support growth or pause to prevent inflation from reigniting.
“A December rate cut is a little dicier than markets have it right now,” said Bullard. “You’re hanging a lot on the slowdown in nonfarm payrolls.”
The Fed’s next moves will depend on new economic data, particularly labor-market indicators, which remain scarce due to the shutdown. In the meantime, investors and policymakers alike are watching closely, navigating uncertainty as the year-end approaches.
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