The Federal Reserve on Wednesday cut its influential interest rate for the third time this year, pointing to a job market that Chairman Jerome Powell said may be weaker than it appears.
The cut of a quarter point — a cautious interest rate move by the Fed — could make it cheaper for average Americans who hold a mortgage, have credit card debt or need to take out or refinance a personal loan. It would also help businesses borrow at lower rates.
But it comes at the risk of stoking inflation that has yet to fall to the Fed’s preferred levels. At a news conference following the Fed’s announcement, Powell said that tariffs were helping to keep inflation higher than it might be otherwise.
Given the Fed’s dual mandate of promoting maximum employment while keeping prices stable, any move the central bank makes comes with risks.
“There is no risk-free path for policy as we navigate this tension between our employment and inflation goals,” Powell said. “Our obligation is to make sure that a one-time increase in the price level does not become an ongoing inflation problem.”
The Fed chair said the committee decided to cut rates because of a number of factors.
“First of all, gradual cooling in the labor market has continued,” he said. “Unemployment is now up three-tenths from June through September.”
Powell also said the central bank believes that there has been an “overstatement” in recent jobs numbers of about 60,000 jobs. In his view, data showing that payrolls have been pacing at about 40,000 jobs added per month are, in fact, really pacing at 20,000 jobs lost per month.
The rate cut had been anticipated by investors, but some doubt remained after a few members of the Fed’s committee expressed concerns that lower interest rates could push consumer prices higher.
The Fed’s “target range” is now set at its lowest level since late 2022.
Stocks soared after the Fed’s announcement, with the S&P 500 closing higher by 0.7%. The Dow Jones Industrial Average surged more than 510 points.
The Fed also announced on Wednesday that it would buy billions of dollars of U.S. Treasury bonds per month, in a move aimed at bolstering the plumbing of the financial system, which also helped push stocks higher.
Three Fed officials dissented from the cut. Fed governor Stephen Miran, who is on temporary leave from the White House, voted for a half-point cut. Regional presidents Jeff Schmid and Austan Goolsbee voted for no change to rates at all.
The three dissents reflect the most friction seen in the normally united committee since September 2019.
In economic projections released alongside Wednesday’s interest rate statement, Fed officials said they saw growth picking up next year more than previously expected, to 2.3%. Fed officials also projected one more interest rate cut next year and another in 2027.
Language used in the Fed’s statement indicated that Wednesday’s cut would likely be the last for now, at least until after its next meeting on Jan. 27-28.
Powell said essentially the same thing. “We are well positioned to wait to see how the economy evolves,” he said in response to a question asking if the Fed is now on hold.
Asked about the growing divergence between how consumers at different income levels are spending — with higher income households continuing to spend at a rapid clip while lower income households show signs of struggling —Powell said that in his view, “it’s clearly a thing.”
Dubbed the “K shaped” economy, Powell admitted that he did not know how sustainable it was. “The best we can do is to have price stability and a strong labor market,” he said.
Powell also predicted that “housing is going to be a problem” for a while, due to the number of people who have “very, very low rate mortgages from the pandemic period” and how high rates on new mortgages are now.
Fed officials also said that they expected inflation to decline to 2.4% next year, down from their previous expectation of 2.6%.
“Available indicators suggest that economic activity has been expanding at a moderate pace,” the Fed said in a statement. “Job gains have slowed this year, and the unemployment rate has edged up through September.”
“Inflation has moved up since earlier in the year and remains somewhat elevated,” members of the Fed’s open market committee added.
“Inflation for goods has picked up, reflecting the effects of tariffs,” Powell said. But, he noted, the services component of the economy is experiencing disinflation.
“It’s really tariffs that’s causing the most of the inflation overshoot,” he said.
Affordability has remained a major issue across the U.S., with President Donald Trump — who has repeatedly and vociferously called for the Fed to continue to cut interest rates — recently downplaying those concerns after having campaigned on them.
Following news of the Fed’s cut, Trump said at a White House event that it should have been “at least doubled.”
Doubt about the overall economic picture lingers, thanks in part to the fog of a data blackout, the result of the prolonged federal government shutdown this fall.
“Very little data on inflation have been released since our meeting in October,” Powell said.
When the delayed data does arrive, Powell said central bank policymakers will “have to look at it carefully and with a somewhat skeptical eye,” given the lag and technical reasons related to the way the data is normally collected.