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Key Takeaways
- The Federal Reserve’s policy committee is widely expected to cut its benchmark interest rate by a quarter-point at the conclusion of its two-day meeting Wednesday.
- Fed officials are cutting rates to reduce borrowing costs on loans and support the job market.
- The Fed had been keeping rates higher for longer to fight inflation, but those concerns have taken a back seat as recent data have shown inflation to be stubborn but not surging out of control.
The Federal Reserve’s policy committee is widely expected to cut its benchmark interest rate by a quarter-point Wednesday, as concerns about the deteriorating job market outweigh inflation fears.
The Federal Open Market Committee is likely to cut the fed funds rate to a range of 3.75% to 4%, its second cut in as many meetings, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data. In recent speeches, many members of the Fed’s policy committee said they were open to cutting rates, although they remained divided about how quickly and how much to do so over the coming months.
Financial markets are pricing in near certainty the Fed will cut rates by a quarter-point Wednesday and then again at its final meeting in December. The outlook for future cuts is uncertain because the Fed is wrestling with both sides of its dual mandate from Congress to keep inflation low and employment high.
What This Means For The Economy
A rate cut will bring the fed funds rate closer to a “neutral” level where it’s neither boosting nor hindering economic activity. Fed officials had been keeping it elevated because of high inflation, but lately, the weakening job market has become a more pressing concern.
While inflation remains above the Fed’s goal of a 2% annual rate, officials have become more concerned about the health of the job market, as job creation has slowed nearly to a halt in recent months. By cutting the fed funds rate, the central bank drives down borrowing costs on short-term loans with the intention of encouraging borrowing and boosting hiring.
Tariffs are a factor in both the price increases and the job slowdown, as the import taxes fuel uncertainty among business leaders and discourage expansion, and push up prices as merchants pass costs along to customers.
Expectations for an October rate cut were cemented Friday when a report showed the Consumer Price Index rose less than expected in September. With the rate cut nearly a lock, financial markets will focus on the Federal Open Market Committee’s official statement released with the rate cut decision, and Fed Chair Jerome Powell’s post-meeting press conference that afternoon.
The Fed is now making rate decisions without much of the data it usually uses to guide its actions. Indeed, the September CPI may be the last major piece of economic data the Fed receives for some time. Important government reports, including on job growth, are being delayed by the ongoing government shutdown and may not be published for October at all.
