US interest rate cut — the phrase dominating economic headlines this week as the Federal Reserve announced yet another reduction in borrowing costs despite admitting to “flying blind” due to a government shutdown that has halted key data releases.
In a move reflecting mounting concern over a slowing labor market, the Fed lowered its benchmark interest rate by 0.25 percentage points, setting the range between 3.75% and 4%, its lowest level in three years. The decision comes amid increasing uncertainty and criticism — both from economists warning of limited data visibility and from political leaders pressing for faster action.
The Cut That Divides the Fed
The decision wasn’t unanimous. Two members of the Fed’s committee dissented — one advocating for a larger 0.5% cut, while another argued for holding rates steady. Their disagreement highlights growing internal divisions about how to balance the risks of inflation and unemployment.
Stephen Miran, currently on leave from the Trump administration’s Council of Economic Advisers, pushed for a deeper cut, arguing that the US job market’s weakness warranted a stronger response. Jeffrey Schmid, president of the Federal Reserve Bank of Kansas City, opposed any cut at all.
The Labor Market: Losing Steam
Fed Chair Jerome Powell, speaking at a press conference after the announcement, described the US labor market as “less dynamic and somewhat softer” than earlier in the year. Job gains have slowed, and the unemployment rate, while still low, has begun to inch upward.
Private-sector data has provided some clarity amid the shutdown. Payroll processor ADP reported that the US economy lost 32,000 jobs in September, confirming fears of sluggish hiring. However, without official Labor Department reports — delayed due to the shutdown — the Fed’s policy decisions are being made in a haze of uncertainty.
“The government shutdown has left us flying blind,” said one economist. “The Fed is steering without its key instruments.”
Inflation Fears Take a Backseat
Just a year ago, inflation was the Fed’s top concern, with President Trump’s sweeping tariffs on major trading partners raising fears of runaway prices. But the latest data shows inflation cooling slightly. September’s consumer price index rose 3% year-over-year, slightly below forecasts, giving policymakers room to ease rates without stoking new inflationary pressures.
Powell acknowledged the shift in focus: “Inflation away from tariffs is actually not so far from our 2% goal.” He emphasized that while tariffs have raised prices for some goods, these effects appear temporary.
The End of Balance Sheet Reduction
In another major policy move, the Fed announced it will stop shrinking its balance sheet — the portfolio of Treasury and mortgage-backed securities it accumulated during past crises — starting 1 December. The balance sheet runoff had been part of efforts to tighten monetary policy after years of stimulus.
Ending the process signals that the Fed is pivoting decisively toward easing — a shift aimed at calming financial markets and supporting economic growth during uncertain times.
Political Pressure and Uncertain Futures
President Donald Trump has repeatedly criticized Powell for not cutting rates aggressively enough, calling for “bold action” to stimulate the economy ahead of next year’s election cycle. On Monday, Trump even suggested he may replace Powell before his term ends in May, a statement that injected further political tension into the Fed’s independence.
Powell, for his part, has maintained that decisions are guided by data, not politics. “There were strongly differing views about how to proceed,” he said, underscoring the internal debate among central bankers. “We’re going to collect every scrap of data we can find.”
What’s Next: December in Focus
Markets had been betting on another quarter-point cut in December. But Powell cooled expectations, insisting that the decision was “not a foregone conclusion.”
Economists such as Michael Pearce of Oxford Economics predict that the Fed will now slow the pace of cuts, citing the “murky” outlook caused by missing data. Meanwhile, JP Morgan’s Michael Feroli suggested that upcoming job reports — assuming the shutdown ends soon — could “significantly change perceptions of the labor market for better or worse.”
Powell compared the situation to driving in dense fog: “What do you do if you’re driving in the fog? You slow down.” His words encapsulated the cautious stance of a central bank trying to guide the US economy through political uncertainty, incomplete information, and fragile confidence.
As 2025 nears its end, the Fed faces a precarious balancing act — stimulating a labor market on the brink of stagnation while avoiding the spark of renewed inflation. For now, the interest rate cut offers some relief, but with the data blackout continuing, America’s economic pilots are still, in Powell’s own words, flying blind.
Source: BBC
