Federal Reserve Cuts Interest Rates
Today, and for the first time since December 2024, the FOMC (Federal Open Market Committee) cut their benchmark interest rate by 25 basis points to 4.00% – 4.25%. This comes after literally months of sustained abuse from the President of the United States, directed at the chair Jerome Powell to slash interest rates. The FOMC voted by 11 – 1 to cut interest rates, with Governor Stephen Miran voting for a 50-basis point cut with the new benchmark interest rate now at its lowest since November 2022. The two governors, Waller and Bowman, who dissented at the last vote both voted with the majority this time round in what is seen as a victory for Chairman Powell as experts had predicted as many as four dissenters.
Chairman Powell commented “Job gains have slowed and the downside risks to unemployment have risen” and he suggested that it will be reasonable to expect Trump’s tariffs will lead to a one-time shift in prices. He went on to say “But it is also possible that the inflationary effects could instead be more persistent and it is a risk to be assessed and managed. Our obligation is to ensure that a one-time increase in the price level does not become an ongoing inflation problem”. Analysts confirmed the interest rate cut was due to the rise in unemployment and officials from the Federal Reserve hinted that there may be two more cuts before the end of the year.
Experts suggest that the Federal Reserve is facing a dichotomy in that lowering borrowing costs will indeed make money cheaper but there is a risk of potentially causing prices to rise and with prices already on the up and due to tariffs the price rises could be even more severe. Recently released data showed that inflation had risen to 2.9% in August having hit a low of 2.3% in April of this year. The director of the CBO (Congressional Budget Office – known to be non-partisan) announced on Tuesday of this week that tariffs have already negatively impacted prices and they were increasing at a faster rate than anticipated.
Federal Reserve officials have said that the labour market is now their biggest concern, with Chairman Powell having stated at the end of August that the “Labour market is experiencing a curious kind of balance where demand and supply for workers had slowed” whilst warning that downside risks to the job market could see an increase in layoffs and unemployment. Chairman Powell also added, “Labour demand had softened and the recent pace of job creation appears to be running below the break-even rate needed to hold the unemployment rate constant. I can no longer say the labour market is very solid”.
Commentators have already suggested that the ¼ of 1% cut in interest rates will not even begin to appease President Trump who has hurled abuse at the Federal Reserve and very personal abuse at Chairman Powell for not drastically slashing interest rates. President Trump wants to return to the era of very cheap money but has so far lucked-out on his ambition to control the Federal Reserve. Indeed, his efforts to fire Governor Lisa Cook (a Biden appointee) for alleged mortgage fraud will now go to the supreme court. Trump has long coveted controlling the Federal Reserve and he has already got influence in the Supreme Court. If, as one expert commented, Trump did gain control over the Federal Reserve and cut interest rates to 1% there would indeed be an initial big boom but it would be followed by a massive bust.
