- The Federal Reserve made .25% cut to benchmark interest rate at its September policy meeting.
- It's the first reduction since December that aims to address job losses even as inflation continues to rise.
- The decision comes amid ongoing criticism and legal challenges of the U.S. central bank.
In a widely anticipated decision, the Federal Reserve voted to reduce its benchmark interest rate by 25 basis points in a move spurred by a weakening U.S. labor market.
The quarter point cut announced Wednesday, which puts the monetary body’s target rate in the 4.0% to 4.25% range, is the first since last December when the Fed’s rate-setting Open Market Committee made the last of three straight interest rate reductions to end the year, shaving 100 basis points off its intra-bank overnight lending rate.
Wednesday’s rate change reflects the central bank’s decision to prioritize the labor side of its dual Congressional mandate to enact policy that maintains price stability while maximizing employment. The Fed is currently facing the two-part dilemma of rising inflation alongside a declining U.S. employment market.
What Fed chairman says about the interest rate
At a Wednesday press conference, Fed chairman Jerome Powell said new data, including a sizable reduction to previous jobs numbers released by the Labor Department earlier this month, had compelled the monetary body to place more focus on bolstering the employment sector.
“I think you could think of this, in a way, as a risk management cut,” Powell said. “What’s different now is you see a very different picture of the risks to the labor market. We were looking at 150,000 jobs a month at the time of the last meeting and now we see the revisions and the new numbers.
“I don’t want to put too much emphasis on payroll job creation but it’s just one of the things that suggests that the labor market is really cooling off and that tells you that it’s time to take that into account in our policy.”
Generally speaking, rate reductions help spur economic activity by reducing the cost of debt which can promote business activities like investment and hiring. Rate hikes, which increase the cost of consumer and commercial debt, quell spending and, theoretically, help slow down inflationary price increases.
More cuts coming?
In addition to the challenges presented by current economic conditions, the Fed has been under fire from President Donald Trump and his administration over disagreements about the Fed’s policy direction. Since beginning his second term, Trump has called out Powell on multiple occasions, and even threatened to fire the central bank leader, claiming he’s at fault for not moving sooner to reduce interest rates. Legal issues have also arisen including recent allegations from the administration that Fed governor Lisa Cook made false statements on mortgage loan applications in 2021, though she has not been charged with a crime.
While some economists predicted extraneous issues could show up in a particularly contentious meeting of Fed officials, the .25% reduction decision was supported by an 11-1 vote by FOMC members, which included both Cook and Stephen Miran, a Trump appointee who was confirmed just before the start of the Fed’s September meeting. Miran, who wanted to see a .50% cut, was the sole dissenting vote.
Powell said in spite of facing a “historically unusual” set of challenges, the monetary body was essentially unified in its policy decision.
“There are no risk free paths now,” Powell said. “We have to keep our eye on inflation and at the same time we cannot ignore and must keep our eye on maximum unemployment. There’s a range of views on what to do but nonetheless we came together today at the meeting and acted with a high degree of unity.”
The Fed, composed of seven governors and the heads of each of the 12 Federal Reserve banks, also shared the expectations for future cuts this year as expressed by individual members. Ten members saw two additional rate cuts happening by the end of the year, nine indicated just one more cut in 2025 and one did not want any cuts, including the one imposed Wednesday.
“A majority of the FOMC is now targeting two further cuts this year, indicating that the doves on the committee are now in the driver’s seat,” Simon Dangoor, head of fixed income macro strategies at Goldman Sachs Asset Management, told CNBC. “We think it would take a significant upside surprise in inflation or labor market rebound to take the Fed off its current easing trajectory.”
Labor market woes
The latest federal jobs report, released earlier this month, found U.S. employers added only 22,000 new positions in August, falling far short of the 75,000 predicted in a Dow Jones survey of economists ahead of the report. The national unemployment rate moved up to 4.3% in August, the highest level since 2021.
The most recent U.S. inflation reading, released last week, finds U.S. inflation came in at 2.9% in August, the highest since January. Core inflation, which strips out volatile food and energy prices, hit 3.1% in August. Housing-related costs, which account for about one-third of the index formula, moved up 0.4% last month. Food prices jumped 0.5%, while energy was up 0.7% as gasoline rose 1.9%, likely indicating tariff impacts on prices, per a report from CNBC.
Here’s how the Fed interest rate change impacts you
Where the Federal Reserve sets its federal funds interest rates — the interest charged on lending between banks to maintain required reserves based on a percentage of each institution’s total deposits — trickles down to consumers in numerous ways.
First, mortgage rates don’t necessarily move in tandem with the Fed’s rate increases. Sometimes, they even move in the opposite direction. Long-term mortgages tend to track the yield on the 10-year Treasury note, which, in turn, is influenced by a variety of factors. These include investors’ expectations for future inflation and global demand for U.S. Treasury bonds. While mortgage rates plunged in the midst of the pandemic, and were hovering around 2% in late 2021, the rates tracked up alongside the Fed’s series of 11 hikes to its federal funds rate.
As of Wednesday, the average rate on a 30-year fixed rate mortgage was 6.35%, according to tracking by Freddie Mac, down .15% from this time last year but well below the 7.04% average rate as of January this year. In October 2023, that rate reached nearly 7.8%, the highest since the late 1990s, but still not excessive from a historical perspective. Home mortgage rates breached the 18% mark in the early 1980s, for example.
Higher rates can also make accessing credit, like qualifying for a home mortgage or new car loan, more difficult as banks tighten lending policy to reflect economic conditions. A poll conducted in March by Bankrate found half of U.S. applicants have been denied a loan or financial product since the Fed began raising interest rates two years ago. Americans with credit scores below 670 have been finding it tough to access credit.
Rates on loans for cars and trucks, currently around 5.25% for those with top tier credit ratings and over 15% for borrowers at the other end of the credit spectrum, should see some easing thanks to the Fed cut.
Credit card rates are set by issuing institutions based on a number of factors, including the card applicant’s personal credit history, but base rates are computed in part using the prime lending rate which is tied to the Fed’s benchmark rates. According to the Consumer Financial Protection Bureau, over the last 10 years, average (annual percentage rates) on credit cards assessed interest have almost doubled from 12.9%in late 2013 to 22.8% in 2023 — the highest level recorded since the Federal Reserve began collecting that data in 1994.