Washington: The US Federal Reserve slashed its benchmark federal funds rate by 25 basis points on Wednesday, bringing it within the target range of 3.5% - 3.75%. This move, anticipated by many, marks the third and final rate cut of the year, following a period where the rate was held steady in the preceding five meetings before a cut was announced in September.
According to Anadolu Agency, the Fed's decision reflects data suggesting that economic activity is expanding at a moderate pace. The Fed noted that job gains have slowed this year, and the unemployment rate has slightly increased through September. It highlighted that recent indicators align with these developments. Moreover, inflation has risen since earlier in the year and is considered to be somewhat elevated.
The Federal Open Market Committee (FOMC), responsible for decisions regarding interest rates, aims to achieve maximum employment and maintain inflation at a 2% rate in the longer term. The Fed emphasized the importance of monitoring risks to its dual mandate, acknowledging an increase in downside risks to employment.
In evaluating future adjustments to the policy's target range, the Fed stated that it will carefully assess incoming data, evolving economic conditions, and the balance of risks. The FOMC also mentioned that reserve balances have declined to ample levels, and as such, it will initiate the purchase of shorter-term Treasury securities as necessary to sustain an ample supply of reserves.
The decision to lower the rate was supported by nine of the twelve governors. However, Stephen Miran advocated for a 50 basis point cut, while Jeffrey Schmid and Austan Goolsbee preferred no change. This decision followed a mixed labor market performance in recent months, with the Fed's focus on maximum employment and stable prices guiding its monetary policy actions.
Despite a lack of official government data due to a recently resolved government shutdown, there have been indications of flattening hiring rates and potential increases in layoffs. The Bureau of Labor Statistics reported that job postings remained relatively unchanged in October, with hiring decreasing by 218,000 and layoffs increasing by 73,000. Nonfarm payrolls saw a modest increase of 119,000 in September, rebounding from a decline of 4,000 in August.
Inflation figures, as measured by the consumer price index (CPI), rose 3% annually in September and increased 0.3% month-on-month, both below expectations. The Fed's preferred inflation measure, the core personal consumption expenditure (PCE) price index excluding food and energy, rose 0.2% month-on-month and 2.8% year-on-year in September.
The rate cut also came in the context of US President Donald Trump's persistent criticism of Fed Chair Jerome Powell, accusing him of not acting swiftly enough amid mounting economic risks. Trump has consistently urged the central bank to reduce interest rates, referencing actions by European central banks and warning that delays could impede the US economy.
Despite political pressure, the Fed maintained the rate for much of the year before commencing an easing cycle in response to a softening labor market. The central bank had previously kept the rate at a historically high level of 5.5% from July 2023 to September 2024 before gradually reducing it to 4.5% last December.