The Fed cut rates again

The Fed is on a rate cut roll, notching yet another quarter-point trim to bring interest rates down to a range of 3.75% to 4.00%.

Fed Chair Jerome Powell cited a cooling labor market as the reason behind the cut. “Although official employment data for September are delayed, available evidence suggests that both layoffs and hiring remain low,” Powell said during the press conference. However, he did not tip his hand on whether a third cut is in the cards for December.

“At this meeting there were strongly differing views about how to proceed in December,” Powell revealed. “A further reduction in the policy rate at the December meeting is not a foregone conclusion.” Markets sank on this news.

The Fed’s latest rate cut may have not been a surprise, but it was also not unanimous. Two central bankers broke ranks: Fed Governor Jeffrey Schmid preferred to keep rates unchanged, arguing that inflation levels had inched up and still remained well above the Fed’s 2% target. Meanwhile, newcomer Stephen Miran pushed for a half-point cut, just as he had back at his debut Fed meeting in September.

JPow’s latest moves

The FOMC also announced that its program of quantitative tightening would end on December 1. Back during the Covid-19 pandemic, the central bank kicked off a round of quantitative easing to keep interest rates low and boost the economy. But in June 2022, the Fed flipped the switch and started shrinking its balance sheet, draining liquidity from the financial system.

Now, with reserves running thin, warning signs have emerged that the bank’s reserves may be too low, which could cause lending markets to seize up as they did in 2019. This latest decision to wind down quantitative tightening could potentially give the economy some much-needed breathing room.

What’s next: Although Fed rate cuts are only just getting started, the clock is ticking down on Powell, whose term as chair is set to expire in May. This means he has only four more FOMC meetings left before a new chair takes his place, and his replacement could be announced as early as December. Once JPow hangs up his hat, odds are good that President Trump will finally get his wish for more rate cuts. Whether that will hurt or help America’s economy remains to be seen.—JD