The Federal Reserve today (Wednesday 29th October 2025) cut its benchmark interest rate by 0.25%, which is its second rate cut this year, in order to stimulate economic activity in the country and to boost investment. This decision was made despite concerns about persistent inflation and fairly low unemployment rates because job hiring is low and firms seem to be laying off workers indicating that the labor market is sluggish.
There isn't really a clear way forward because the US economy is very uncertain. The Chair of the Fed, Jerome Powell compared the current economic uncertainty to driving in the fog and emphasized slowing down. The rate cut aims to make borrowing cheaper for consumers and businesses but it also risks further fueling inflation, which recently rose to 3%, above the Fed’s 2% goal. It's going to be interesting to see how the economy progresses and what the Fed will do on December 10th when it makes its next rate decision.
This rate cut comes as the US economy faces a dilemma with the labor market cooling while prices are still high. Hiring rates have collapsed to levels last seen in the years following the 2008 global financial crisis, and the ongoing government shutdown has also made it harder to assess the economy, as key data releases are delayed. And economists say lower interest rates can sometimes worsen inflation by increasing economic activity. Jerome Powell acknowledges this risk especially looking at the effects of President Trump's tariffs that suggest that inflation could continue to increase.
The issue also is that, the economy is showing mixed signals with strong GDP growth driven by an AI investment boom. Powell described the rate cut as a risk management step to balance the conflicting trends in the economy.
There is disagreement within the Fed about what to do next. Powell stressed that another rate cut at the December meeting is not guaranteed. Some policymakers urge caution, warning that lowering rates too quickly could worsen inflation, which is also being driven by tariffs. And some analysts believe that the tension between elevated inflation and the labor market cooling is easing, but not for reasons that look good for the broader economy.
Ultimately, the Fed is navigating a complex situation because inflation remains stubborn, the labor market is fragile, and government shutdown has made economic data incomplete. Fed governor, Christopher Waller made a really good point here, "either economic growth softens to match a soft labor market, or the labor market rebounds."
Source: https://www.nbcnews.com/business/economy/federal-reserve-interest-rate-decision-rcna240337
With the new rate cuts and inflation continuing to hover at and around 3%, I wonder if the Federal Reserve will be okay with the 3% level instead of the historic 2% inflation target. The labor market is definitely one of the biggest pieces of the puzzle that the Fed has to solve right now, and to do so, the Fed needs access to critical data that isn't being released due to the government shutdown. December's Fed meeting will definitely be an important date on everyone's calendars as investors look towards the future state of the economy.
ReplyDeleteThat’s a really interesting breakdown. The rate cut definitely makes sense if the Fed is trying to prevent the job market from weakening even more, but it feels like a risky move with inflation still above target. It’s kind of a no-win situation right now — either they keep rates high and risk more layoffs, or they lower them and risk prices going up again.
ReplyDeleteI also thought Powell’s “driving in the fog” comparison was a good way to describe it, because the economy really does feel unpredictable right now with the AI boom, tariffs, and the government shutdown all happening at once. It’ll be interesting to see what happens at the December meeting and whether the Fed thinks this actually helped.
This reflects how complicated the situation is for the Fed right now. Cutting rates can help businesses and people borrow more easily, but it might also make prices rise even faster. Powell’s “driving in the fog” comment makes sense, it feels like no one can clearly see what’s ahead. The economy looks strong in some ways, like with AI growth, but weak in others, like hiring. It’s a tough balance, and the next Fed meeting in December will be very important to see which direction they take.
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