US Fed Cuts Interest Rates To Tackle Inflation And Labour Market Challenges

The US Federal Reserve made a significant policy move Thursday, reducing interest rates by 25 basis points as the economy grapples with a cooling labour market and inflation that, while improved, remains elevated.

This marks the second rate cut in the current easing cycle, following an initial reduction in September.

The Federal Open Market Committee (FOMC), the central bank’s policy-setting body, in a statement on Thursday noted, “Since earlier in the year, labour market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.”

In light of these conditions, the central bank lowered the target range for the federal funds rate to between 4.5% and 4.75%.

“The labour market has generally eased, and while inflation has come down, it remains somewhat elevated,” the FOMC stated in its policy update.

The move follows a weak jobs report for October, which showed that the US economy added only 12,000 jobs, far below expectations, in part due to a strike and the impact of recent natural disasters like hurricanes.

The updated employment report also revised down job gains for the previous two months, with August’s gains adjusted to 78,000 and September’s to 223,000, which is 112,000 fewer jobs than originally reported.

This downward adjustment highlights the challenges facing the labour market.

Earlier this year, the Federal Reserve had already started easing its stance, with a 50-basis-point cut in September (the first such move in over four years) marking the beginning of the current rate reduction cycle.

Powell: Core Inflation Remains High Despite Easing Overall Inflation

At a press conference, Federal Reserve Chair Jerome Powell emphasized that while inflation has eased over the last two years, core inflation remains persistently high.

Powell pointed to the Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge, which rose 2.1% in the year leading up to September.

Core PCE, which excludes food and energy costs, rose by 2.7%, above the Fed’s target.

“The job is not done on inflation,” Powell stated, reiterating that the Fed’s work continues, even as the economy shows signs of recovery.

He also highlighted that the central bank is in the process of recalibrating monetary policy from a restrictive stance.

The combined impact of two rate cuts has seen the target range lowered by 75 basis points since September.

Despite the economic challenges, Powell acknowledged that many Americans are still struggling with high prices, and it could take years of wage growth to feel relief.

“It takes some years of real wage gains for people to feel better,” Powell said.

Rate Cut Follows Trump’s Landslide Victory Focused On Inflation & Reform

The latest rate cut came shortly after the 2024 US presidential election, in which Republican candidate Donald Trump secured a landslide victory, running on a platform focused on addressing inflation, immigration reform, and foreign policy issues.

However, Powell clarified that the Fed’s policy decisions would remain independent of political changes.

“Specifically, whether and to what extent those (new) policies would matter for the achievement of our goal variables, maximum employment, and price stability, we don’t guess, we don’t speculate, and we don’t assume,” he added.

When asked about his future under the new administration, Powell was firm. He dismissed suggestions that he would resign if requested by President-elect Trump, replying with a definitive ‘no’.

He further clarified that under current law, a sitting Fed chair cannot be dismissed by the president, stating, “Not permitted under the law.”

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