The U.S. central bank delivered their widely expected second rate cut of the year on Wednesday, reducing interest rates by another quarter of a percentage point.
Previous comments made by Federal Reserve Chair Jerome Powell and the economic opinions of policymakers listed in the Federal Open Market Committee’s Summary of Economic Projections sparked high market confidence in a cut. This led to market responses to a rate cut being priced in before the cut actually came.
That information, which came with the Fed’s first rate cut in September, also led to widespread confidence that a third rate cut would come in December. Now, drastically varying opinions within the central central bank and a continued lack of economic data due to the government shutdown is casting that into doubt.
With the government being shut down, the federal reserve does not have access to economic data usually collected by various arms of the federal government. That data is the primary information the central bank uses to inform interest rate decisions. It becomes less and less likely the federal reserve will take any action on interest rates the longer the shutdown continues.
When speaking on the topic, Jerome Powell said, “What do you do if you’re driving in the fog? You slow down.” This, combined with Powell describing “strongly differing views” among his colleagues, led financial markets to reduce bets on a third rate cut. Powell’s comments suggest that any further cuts won’t occur until next year.
The discussion of rate cuts comes at a very interesting time. Multiple large tech firms, such as Palantir, Salesforce, and Klarna, say they have either cut or plan to reduce their workforce to make way for AI adoption. Most recently, Amazon announced job cuts that would affect up to 30,000 employees.
These companies are so large that their job cuts alone could hugely inflate nationwide job cut data, which could lead to a misrepresentation of the state of the national job market. Even if the wider labor market begins to strengthen, the sheer volume of these AI related cuts could make that strengthening hard to see in the data, which the Fed relies on to make interest rate decisions.
Overall, these rate cuts are a positive for people looking to lend, seek investment, or find a job, as rate cuts are meant to incentivize lending, investing, and hiring. Cutting rates does risk increasing inflation, but the Federal Reserve has not seemed concerned about that possibility in recent times. In the recent cuts, Kansas City Fed President Jeffery Schmid was the only board member to cast a dissenting vote favoring no rate cut, citing concerns over inflation.
