Fed cuts US interest rates again despite ‘flying blind’

The US Federal Reserve has moved ahead with interest rate cuts as inflation concerns continue to take a backseat to worries about a sluggish labor market.

That came despite the U.S. government shutdown approaching the one-month mark, which has delayed official data and left central bankers flying blind on the labor market, economists said.

The US central bank said on Wednesday it was cutting its key lending rate target by 0.25 percentage points, placing it in a range of 3.75% to 4%.

Fed last month lower interest rates for the first time since December last year. Economists had expected the move to usher in further cuts, but a lack of data means the trajectory of future cuts looks unclear.

Two voting members of the Fed committee spoke out against the central bank's decision on Wednesday.

Stephen Mearan, who is on leave from his post as head of US President Donald Trump's Council of Economic Advisers, voted for a larger cut of 0.5 percentage point. Jeffrey Schmid, president of the Federal Reserve Bank of Kansas City, voted to keep rates steady.

The Fed's latest cut lowers its key lending rate target to its lowest level in three years, lowering U.S. borrowing costs.

Slowing job hiring prompted the Fed to resume its rate-cut cycle in September. In its policy statement on Wednesday, the central bank confirmed that “job growth has slowed this year” and that the unemployment rate, although remaining low until late summer, has now “increased.”

At a news conference after the rate cut, Fed Chairman Jerome Powell called the labor market “less dynamic and somewhat softer” than earlier this year, partly pointing to lower immigration.

However, he said, labor market weakness does not appear to be worsening.

But the ongoing government shutdown has stalled the release of the official monthly jobs report for September, limiting central bankers' understanding of how the labor market has fared since their last meeting.

Alternative sources, including private sector data, indicate a continuing trend of sluggish hiring. The U.S. economy lost 32,000 jobs in September, according to payroll company ADP.

The Ministry of Labor published September inflation data last week. The annualized rate of 3% was slightly lower than economists had forecast, raising the prospect that rate setters will again vote to cut borrowing costs.

Concerns about inflation caused by tariffs took center stage earlier this year when Trump moved to impose steep tariffs on many of the country's largest trading partners.

Inflation remains above the Fed's 2% target. But while tariffs appear to be pushing up some consumer prices, September's milder-than-expected inflation figures allowed the Fed to focus on stimulating the labor market by cutting rates, Bank of America economists said.

“Inflation before tariffs is actually not that far from our 2% goal,” Powell told reporters. Central bankers hope the tariffs will only lead to a one-time increase in the prices of certain consumer goods, he said.

The Fed also said Wednesday it will stop shrinking its balance sheet – its portfolio of government debt and mortgage-backed securities – on Dec. 1.

For more than three years, the central bank has been in a process of scaling back its purchases during the pandemic and previous financial crises as it sought to stimulate the economy and lower interest rates. This process of economic contraction is now about to end, as many expected, amid signs of stress in financial markets.

Wall Street was betting on another quarter-point interest rate cut by the central bank at its final meeting of the year in December.

But those rates fell after Powell stressed on Wednesday that the December cut “should not be viewed as a foregone conclusion – in fact, it is far from it.”

“Future moves are becoming increasingly controversial,” said Michael Pearce, deputy chief US economist at Oxford Economics. “We expect the Fed to slow the pace of its cuts from here on out.”

A lot could still change before the next Fed meeting. It could receive three new jobs reports that could “significantly change perceptions of the labor market for better or worse,” Michael Feroli, chief U.S. economist at JP Morgan, wrote in a note.

At the same time, if the government shutdown continues and continues to limit the availability of government data, it could also prompt the Fed to sit on its hands later in the year.

“What to do if you are driving in fog? You slow down,” Powell said.

He told reporters that “there are very different views among Fed committee members about how to proceed” and the decision will ultimately depend on incoming economic data.

“We're going to collect all the data we can find,” Powell said.

The Fed Chairman has come under pressure from President Trump, who has repeatedly called on him to cut interest rates.

On Monday, Trump suggested he would announce a replacement for Powell, whose term expires next May, by the end of this year.