US Federal Reserve policymakers cut their target interest rate today by a quarter point, the third reduction of the year, as they focus on shoring up a weakening labor market that they see as a greater threat to the economy than stubbornly elevated inflation.
The Fed's Federal Open Market Committee (FOMC) on Wednesday cut the federal funds rate by 0.25pc to 3.5-3.75pc, following quarter point cuts in September and October.
In their economic projections, Fed policymakers and governors penciled in a single quarter-point rate cut in 2026 with a similar cut the following year. Median projections forecast the unemployment rate falling to 4.4pc by the end of 2026 from 4.5pc at the end of 2025, with inflation falling to 2.4pc at the end of next year from 2.9pc estimated for the end of 2025. They forecast gross domestic product growth of 2.3pc by the end of next year, up from 1.7pc forecast for the end of 2025.
"Near-term risks to inflation are tilted to the upside, and risks to employment to the downside, a challenging situation," Fed chair Jerome Powell told reporters after the meeting. Still, he said, with the target rate now seen to be near "neutral" — meaning monetary policy is neither stimulating nor limiting the economy — "we are well positioned to wait to see how the economy evolves".
The Fed is largely operating in an information desert because the 43-day partial federal government shutdown halted the flow of most government economic data, including the vital labor market and inflation reports that are the mainstay of the Fed's dual mandate to maintain maximum employment and stable prices.
The latest employment report — September data that was released on 20 November — showed better than expected job growth of 119,000, but that followed initially reported growth of just 22,000 in August and similarly slow growth rates going back to April. Powell said he expected revisions to the labor data to show even slower hiring in recent months.
Before the Fed's rate announcement, the CME's FedWatch tool on Tuesday showed an 89.6pc probability of a quarter-point cut, up from 66.9pc odds a month earlier, amid concerns about a slowdown in hiring.
Prior to the first rate cut of this year in September, the FOMC had held the target rate unchanged at five meetings this year. Three rate cuts late last year cumulatively cut the rate by 1 percentage point from a near two-decade high, an effort to bring down post-Covid inflation that topped out at 9.1pc in mid-2022.
Powell has come under attack from President Donald Trump, who frequently derides him for allegedly being slow to cut rates. He threatened to fire Powell, whose term in office ends next May, and has assigned treasury secretary Scott Bessent the task of interviewing candidates, including current and former Fed officials and governors and economists, to replace Powell.
