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The Federal Reserve cut rates for the second time in 2025 at its meeting this week. The rate was cut by 25 basis points and now sits at 3.75%-4.00%.
The rate cut reflects a cautious approach the Fed is taking due to missing economic data and growing internal divisions among Federal Open Market Committee (FOMC) members.
Fed Chair Jerome Powell said after the announcement that a widely expected further cut in December is “far from” a foregone conclusion, noting that FOMC members have strong, differing views about future rate cuts.
The Fed’s decision was made without full visibility of the state of the economy, as the federal government shutdown has delayed the release of most key data sets.
Notably, there were two dissents among the 12 members of the FOMC: Stephen Miran wanted a 0.5 percentage point cut while Jeffrey Schmid wanted to keep rates where they were. FOMC dissents were once rare, but there’s been an uptick at recent meetings.
Cut is Fed’s second of the year
The Fed made its first rate cut this year — also by 25 basis points — at its September meeting. Rate decisions impact how much it costs to borrow, credit card interest rates, as well as savings rates. Low rates benefit borrowers, while high rates increase the yield for savers. However, the last two small rate cuts probably won’t make a big difference to consumers, says NerdWallet Senior Economist Elizabeth Renter.
“Over time, lower rates could mean a stronger labor market and an easier time finding work, but this cut is unlikely to move the needle substantially in any direction,” says Renter.
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The Fed’s dual mandate to maximize employment while keeping prices stable is under stress, but with the shutdown the actual data is unclear. However, one key inflation data point was released last week: The consumer price index (CPI), which showed moderate inflation — 0.3% annual growth in September versus 0.4% in August. The CPI provided the Fed with a partial view of inflation, despite the data blackout on labor figures including unemployment and jobless claims. But the labor picture is still incomplete.
“In the absence of recent federal jobs data, the Fed still sees the risks to the labor market as possibly outweighing the risks of continued elevated inflation,” says Renter. “But they’re moving cautiously, as the cut is not in response to a certain downturn. Instead the Fed is hoping they can move rates gradually to prevent a downturn, walking a potential tightrope but taking small steps to minimize the risk of a misstep.”
The government shut down on Oct. 1 and shows no sign of ending soon. The Senate is deadlocked as Democrats hold firm on health concessions that Republicans refuse to accept.
Until the government shutdown ends, it’s unlikely that other data reports will be released, including two that were expected this week: the third quarter first estimate of gross domestic product (GDP) which shows economic growth, and the personal consumption expenditures (PCE) — the Fed’s preferred measure of inflation. Earlier this week, the White House said that, since data is not currently being collected, there will likely not be a release of CPI data for October at all next month.
At the press conference, when asked how the shutdown and resulting data delays may impact the FOMC’s decision at its December meeting, Powell said, “We just don’t know what we’re going to get. If there is a very high level of uncertainty then that could be an argument in favor of caution about moving, but we’ll have to see how it unfolds.”
The futures market CME Group’s FedWatch tool forecasts another 25 basis point cut at the Fed’s final meeting of the year, Dec. 9-10.
(Photo by Alex Wong/Getty Images news via Getty Images)
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