The Federal Reserve cut its benchmark interest rate by a quarter of a percentage point Wednesday, easing monetary policy for the second time this year. The cut, which was widely expected, reduces the federal funds rate to a range of 3.75% to 4%, and comes even as inflation continues to run near 3%, well above the Fed’s 2% target rate.
In addition to the cut, the Fed announced that it would halt the selloff of its $6.6 trillion asset portfolio, effectively freezing the size of the central bank’s balance sheet as of December 1.
There were two dissenting votes on the Federal Open Market Committee, whose 12 members determine the benchmark rate. Recent Trump appointee Stephen Miran — a former White House economic adviser who shares the president’s preference for low interest rates — voted for a 50-basis-point rate cut, while Kansas City Fed President Jeff Schmid voted to hold rates steady.
In a post-meeting press conference, Fed Chair Jerome Powell told reporters that the outlook for the rest of the year is highly uncertain. During discussions, Fed officials had “strongly different views about how to proceed in December,” at the year’s last meeting. Asked about market expectations for another rate cut at the end of the year, Powell said, “It’s not to be seen as a foregone conclusion. In fact, far from it.”
Looking for neutral: Powell explained that the Fed officials are seeking a neutral stance for interest rates, given that the central bank’s mandate is pointing in opposite directions, with elevated inflation calling for higher rates and a weakening labor market calling for lower rates. The latest rate cut is intended to boost the labor market, which has seen hiring slow in recent months.
At the same time, Powell said Fed officials haven’t seen signs of significant changes in the economy over the last few weeks. Although the government shutdown has caused some economic reports to be delayed or canceled, Powell noted that state-level employment data show no signs of increased distress. Powell also said he was confident that the Fed would pick up signals of any marked deterioration of the economy, even without the full suite of federal data sources being available because of the shutdown.
As for inflation, Powell said that goods that have not been affected by President Trump’s tariffs are seeing price increases of roughly 2.3% or 2.4%, close to the Fed’s 2% target rate. Inflation on goods affected by tariffs is higher, but Powell said the base case remains that the price increases occurring as importers pass their higher costs onto consumers will be a one-time event, and not the spark of a new inflationary spiral.
“Overall, it's a good picture,” Powell said.
What the experts are saying: Investors were alarmed by Powell’s suggestion that the Fed may hold rates steady at its next meeting, with the S&P 500 giving up gains to end the day slightly lower and bond yields rising.
Stephen Juneau, senior U.S. economist at BofA Securities told Bloomberg that Powell’s comments “came off as more hawkish than we expected.”
Other analysts interpreted Powell’s remarks as more neutral or even dovish on inflation, simply reflecting the uncertain condition of the economy and the need to see more data before any decisions are made.
RSM Chief Economist Joseph Brusuelas said on social media that another rate cut remains a strong possibility. “We anticipate that the central bank will reduce its policy rate by an additional 25 basis points” at its next meeting in December, he said, adding that he expects the Fed to continue cutting until it reduces its benchmark rate to 3% over the next two years.