Key Points

  • The Federal Reserve cut its key interest rate by 25 basis points on Wednesday after a two-day meeting, lowering the target range to 3.75% to 4%. This is the central bank's second rate cut this year, following a 25-basis-point cut in September citing a weakening labor market.
  • Although the rate cut was supported by a "strong majority" of votes, Fed Chair Jerome Powell warned at the post-meeting press conference that there is "strong disagreement" within the committee on how to proceed with rates at the final meeting of the year on December 10. Members Stephen Miran and Jeffrey Schmid dissented from this cut, with Miran advocating for a 50-basis-point reduction and Schmid favoring holding the federal funds rate steady.
  • Powell said: "A further reduction in the policy rate at the December meeting is not a done deal, far from it. Policy is not on a preset course."

In-Depth Analysis

Powell noted that in recent months, the tension between the central bank's dual mandate of lowering inflation and achieving maximum employment has continued to intensify, and the balance of risks between the two policy goals has shifted.

Wednesday's decision came after data released by the U.S. Bureau of Labor Statistics on October 24 showed that inflation rose less than expected in September but remained above the Fed's 2% target. The Consumer Price Index (CPI) rose 3% year-over-year, and core CPI, excluding food and energy prices, also rose 3% for the month.

However, Powell said that job growth has slowed significantly since earlier this year, and labor demand is also contracting.

"I would point out that the situation we face now is that inflation risks are tilted to the upside, while employment risks are tilted to the downside," Powell said. "We only have one tool. You can't address both problems at the same time."

In median projections released in September, the Fed had anticipated two additional 25-basis-point rate cuts in 2025, bringing the federal funds rate to 3.6% by the end of the year, while also raising economic growth forecasts. But Powell emphasized on Wednesday that disagreements among the 19 members of the Federal Open Market Committee over risks and projections cast doubt on whether rates will be cut in December.

"I often say we don't make decisions in advance, but I would add: this should not be seen as a done deal. In fact, far from it," he said when discussing the possibility of lowering the federal funds rate in December.

According to data from the CME Group's FedWatch tool, interest rate futures traders see about a 66% probability that the central bank will cut rates by another 25 basis points at its December meeting.

Powell also highlighted other ongoing complexities the Fed faces in pursuing its dual mandate, including tariff uncertainty, the potential impact of AI investment, and the government shutdown causing the central bank to lose several key data sources. This includes September employment data, although the Fed still has access to state-level initial jobless claims, job openings, and survey data.

"What do you do when driving in fog? You slow down," Powell said regarding the government shutdown, though he noted it is a temporary situation.

The central bank is also working to ensure that volatile tariff and trade policies do not evolve into a "persistent inflation problem." Powell cited previous survey data, noting that the Atlanta Federal Reserve has observed that tariffs could lead to a significant rise in inflation that may persist into next year.

When asked about the potential impact of AI on the economy and labor market, Powell acknowledged that "quite a few companies" have announced layoffs or hiring freezes, "and a lot of times they talk about AI and what it can do," he said. "So we're watching it closely."

While this "could certainly have an impact on job creation, we haven't seen that yet in the initial claims data," he said. As for investment in the technology, "I think spending on building data centers across the country is not particularly sensitive to interest rates," he said. "It's based on a long-term assessment that there will be substantial investment in this area and it will drive productivity gains."