The Fed announced a quarter-percent cut Wednesday, even as the government shutdown disrupts major data releases.
The second rate reduction of the year is in alignment with expectations: CME FedWatch projected a near-100% chance of a cut before the meeting and the central bank previously penciled in cuts for its last two meetings of 2025 in its September economic projections.
The Federal Open Market Committee had to make a decision this month without a full economic picture. The government shutdown — which is approaching the one month mark — led to a delay of the Bureau of Labor Statistics’ consumer price index inflation report until last Friday. The September jobs report still hasn’t been released, and would have given updated unemployment and job creation numbers.
The shutdown “will weigh on economic activity,” Chair Jerome Powell said at the press conference, but the impacts will likely resolve when the government reopens. “This is a temporary state of affairs,” he said.
Powell emphasized the importance of the Fed’s dual mandate goal: maximum employment and tempered inflation. A second cut suggests a continuation of this strategy as the job market started to look softer over the summer.
“There is no risk-free path for policy as we navigate this tension between our employment and inflation goals,” Powell said.
The jobs report wasn’t released in October
The government shutdown means that the Fed is missing key pieces of jobs data.
Without a September jobs report, Fed leaders had to lean on previous patterns in the labor market. Based on available public and private jobs data, Powell said labor market conditions “have not changed much” since last month. Job openings have declined in recent months and unemployment has crept up.
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Powell also noted the slowdown in labor supply, which he attributed to lower labor force participation and immigration. Over the summer, the number of Americans looking for work eclipsed the number of available roles. He said he’s watching recent AI-related layoffs at major companies like Amazon “very closely” and “it could absolutely have implications for job creation,” though he said interest rates themselves have little to do with AI’s growing role in the economy.
The consumer price index report came a couple of weeks late, but the Fed now has insight into price growth. The inflation measure rose slightly below the 3.1% forecast in September, hitting 3% for the first time since January as tariffs have gone into effect. The central bank’s goal is to push inflation closer to 2% in the long run.
“You’ve seen goods prices increasing and that’s really due to tariffs,” Powell said, adding. “Inflation away from tariffs is not too far from our 2% goal.” He said that the Fed is keeping its policy “modestly restrictive” to account for this uncertainty.
Powell is likely leaning on other economic indicators, too. Soft markers like consumer sentiment dipped in October, meaning that Americans are feeling less financially secure, though consumer spending appears relatively healthy.
Those other indicators, which also include the informal surveys that the Fed regularly publishes in its Beige Book, could give some insight into the state of the economy. “It doesn’t replace the government data, but it gives us a picture,” Powell said. “If something material were happening, I think we would be able to pick that up. But I don’t think we will have a very granular understanding of the economy while this data is not available.”
Congress has not yet reached a budget agreement, and it’s unclear when the government will reopen.
A Fed divided
The Fed has been uncharacteristically divided in recent decisions.
Fed newcomer Stephen Miran preferred a half-percentage point cut over October’s quarter-point decision and governor Jeffrey Schmid wanted to hold rates steady.
Powell added during Wednesday’s press conference that there are “strongly differing views” from the committee about how the Fed should act in December. He continued, “Now we’re 150 basis points closer to neutral than we were a year ago, and there’s a growing chorus of feeling like maybe this is where we should at least wait a cycle.” He said the government shutdown is pushing some committee members to be more cautious. “What do you do when driving through the fog?” he added. “You slow down.”
He said a rate change in December is “not a forgone conclusion, far from it” and “policy is not on a preset course.”
In the September meeting, a few committee members indicated their dissent toward Powell’s restrictive policy patterns earlier this year, and one member called for a 1.25% rate reduction by the end of the year last month — far more than any other voting members. Minutes from the meeting also show Fed governor Michelle Bowman wanted a deeper rate cut.
Powell has faced mounting political pressure from the Trump administration. The president has called on the Fed to cut rates: “I really believe that Jerome ‘Too Late’ Powell is an OBSTRUCTIONIST!” he wrote in an October 1 Truth Social post.
And, personnel changes on the Federal Open Market Committee could give the White House more sway over monetary policy. Miran, chair of the White House’s Council of Economic Advisors and Trump appointee, was confirmed as a new Fed governor last month. He replaced Adriana Kugler, who resigned in August.
The president has called on Fed governor Lisa Cook to resign, alleging that she committed mortgage fraud. Cook remains in her seat and a September Reuters report found evidence the allegations were false.
Powell has maintained that the Fed is nonpartisan and will make decisions based solely on economic data. A sustained pattern of rate cuts could ease costs for consumers looking to borrow for mortgages, auto loans, and credit cards.
“Ultimately, lower rates will support demand and support hiring over time,” he said. “But we also have to be careful about this.”
