In a move widely expected by financial markets, the Federal Reserve’s policy committee voted Wednesday to lower its benchmark rate by a quarter-point, dropping the overnight lending rate for banks to a target range of 3.75% to 4%.
Two voting members dissented, reflecting the growing divergence in policy views that have emerged among central bankers as underlying economic conditions grow more unpredictable.
Fed Governor Stephen Miran preferred to lower the target range for the federal funds rate by 0.5%. Jeffrey Schmid, president and CEO of the Federal Reserve Bank of Kansas City, preferred no change to the target range.
The decision by the Federal Open Market Committee (FOMC) arrives amid a U.S. government shutdown that commenced Oct. 1, presenting unusual conditions for central bankers.
Only once before has the Federal Reserve lowered the target range of the federal funds rate during a government shutdown. Fed Chair Alan Greenspan announced a 25-basis-point reduction in interest rates on Dec. 19, 1995, four days into a 21-day shutdown.
In a statement, the Fed noted that “uncertainty about the economic outlook remains elevated,” and “inflation has moved up since earlier in the year and remains somewhat elevated.” But the statement also observed that “downside risks to employment rose in recent months.”
Confronting floundering labor markets, steadily rising consumer prices and a government data blackout induced by the shutdown, Wednesday’s decision reflects Fed policymakers’ willingness to err on the side of economic stimulus in the meantime.
The Fed has a dual mandate to maintain stable prices and maximum employment. Intelligence relied on by policymakers to make interest rate decisions flows from two main sources: published government statistics and industry interlocutors.
All scheduled releases of official government data have been delayed because of the shutdown, except for the consumer price index (CPI) for September, originally scheduled for release on Oct. 15. The White House Office of Management and Budget recalled some Bureau of Labor Statistics (BLS) workers to compile that widely cited measure of inflation ahead of statutory Social Security deadlines.
Last month’s 3% annual rise in core CPI, which excludes more volatile food and energy prices, did not shift the Fed’s focus from bolstering weak labor markets. Consumer prices rose across most major indexes, including shelter, airline fares, recreation and apparel.
Even as the pace of inflation runs markedly higher than the Fed’s stated 2% target, a summer of slow job creation prompted policymakers to lower the fed funds rate by 25 basis points at its September meeting, marking its first rate cut of 2025.
Prior to September’s rate cut, Fed Chair Jerome Powell had urged patience on easing borrowing costs, saying the central bank needed to take a wait-and-see approach on the potential inflationary impacts of the Trump administration’s tariff policies.
In addition to unreported weekly jobless claims, a missed September jobs report — the Employment Situation Summary scheduled for release by the BLS on Oct. 3 — showcases the uncertainty surrounding labor markets’ progression since August.
The most recent Job Openings and Labor Turnover Survey (JOLTS), published by the U.S. Census Bureau one day before the government shutdown began, showed hirings and firings remained essentially flat in August as job gains stagnated.
Economists estimate that the missed September jobs report would have shown just 54,000 jobs added last month. ADP, a payroll processing company, released a preliminary report Tuesday estimating that private U.S. employers added an average of 14,250 jobs per week during the four weeks ending Oct. 11.
According to Fed’s Summary of Economic Projections, or “dot plot” released concurrently with the September rate decision, most of last month’s meeting participants anticipated two more rate cuts in 2025, driven by a desire to offset downside risks to employment. Wednesday’s decision suggests the shutdown has not injected enough uncertainty to shift Fed policymakers from September’s base-case scenario.
