The U.S. Federal Reserve on Wednesday cut interest rates for a second time this year by a quarter point with the move brings the benchmark rate down to around 3.9%, a step to cushion weakening economic growth while inflation is still high.
Fed officials stated that although economic activity is still growing, hiring has diminished and prices have crept higher. The rate reduction should help lower the cost of borrowing on auto loans, credit card, debt and business loans, although the effect on mortgage rates might be secondary.
Powell’s Warning: Shutdown to Weigh on Growth
Fed Chairman Jerome Powell, during his post-meeting press briefing, warned that the current government shutdown, which started on October 1, will slow economic activity in the short term. The shutdown has paralyzed essential federal activities, such as food aid and federal worker pay, as Congress remains in deadlock over appropriations.
“The shutdown will have a drag on economic activity while it continues, but these effects will be reversed when it concludes,” Powell said.
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Inflation vs. Weakening Jobs Data
The central bank is confronted with a familiar but difficult problem: persistent inflation coupled with a deteriorating labor market. Large companies have made layoff announcements over the past few months and private numbers indicate one of the weakest job markets of the 21st century.
At the same time, consumer prices in September rose to their highest level since January. Historically, lower rates are applied to boost growth during periods of slowdown in employment, but they can also drive inflation an equation that the Fed is balancing very carefully.
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Market Response & Economic Impact
After the announcement, U.S. stock markets increased modestly, indicating guarded optimism. Lower rates generally stimulate spending and investing, relieving consumers and businesses. Powell cautioned that the Fed is working with reduced visibility because the shutdown has postponed official government reports on jobs, inflation and spending. The central bank is having to rely on private economic gauges in the interim to inform its policy decisions.
What will be December Decision on the Horizon
The Fed’s next meeting is on December 10, when policymakers will again weigh whether additional rate action is needed. Powell stressed there is no preconceived path for future policy action showing that the committee has different views.
For the time being, the latest rate cut is an attempt to stabilize the economy in a period of uncertainty cutting the twin burdens of inflation management and job saving in an economically and politically turbulent environment.
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Disclaimer: This article is for informational purposes only and should not be considered financial or investment advice. Readers should verify independently.
