The U.S. Federal Reserve has announced a second interest rate cut this year in an effort to bolster economic growth and employment, despite ongoing inflation. Job creation has slowed, and the unemployment rate has slightly increased but remains low as of August, according to the Fed’s statement. Due to a federal shutdown since October 1, official unemployment data has not been released, prompting the Fed to rely on private-sector indicators.
This recent decision lowers the Fed’s key rate to approximately 3.9%, down from around 4.1%. The central bank had previously raised rates to combat significant inflation in 2023 and 2024, with rates peaking at about 5.3%. The decrease in rates could eventually lead to reduced borrowing costs for mortgages, auto loans, credit cards, and business loans.
The Federal Reserve faces challenges as hiring remains sluggish while inflation remains above the target of two percent. Complicating matters further, the Fed lacks its usual government economic data due to the shutdown, including reports on jobs, inflation, and consumer spending. This data deficiency has increased uncertainty regarding future rate adjustments, with the Fed hinting at a potential rate reduction in December.
Traditionally, the Fed raises short-term rates to combat inflation and lowers rates to stimulate borrowing, spending, and employment. The current situation presents a conflict as the Fed aims to support job growth by reducing borrowing costs while also keeping rates high enough to prevent excessive economic stimulation that could exacerbate inflation.
