The US Federal Reserve has cut interest rates for the second consecutive month over worries about a slowing labour market but warned another monetary easing this year was “not a foregone conclusion”.
The central bank of the world’s largest economy reduced its borrowing costs to 3.75-4 per cent as widely expected by financial markets and the second monetary easing of the year. Stephen Miran, the newest Fed rate-setter and an ally of President Trump, voted for a larger half a percentage point interest rate cut, while Jeff Schmid voted to keep interest rates unchanged — the Fed’s first three way vote split since 2019.
Traders had put a 90 per cent probability on the Fed cutting interest rates again in December, but Jerome Powell, its chairman, said splits on the rate-setting committee meant another reduction was not guaranteed.
Powell said that there were “strongly differing views on how to proceed in December”.
“A further reduction in the policy rate is not a foregone conclusion, far from it. At a time when we have tensions between our two goals, we have strongly differing views. We haven’t made a decision about December.”
Powell’s hawkish comments accelerated a sell-off in US government bonds, drove up the value of the dollar, and caused stock prices to reverse.
Short-term borrowing costs, as represented by the yield on two-year Treasury bonds, rose by 0.1 percentage points and by 0.08 percentage points on ten-year bonds. The dollar gained more than 0.17 per cent against a basket of currencies, while stocks on Wall Street retreated from their run of record closes after Powell spoke. Traders reduced their bets on a December easing from over 90 per cent to 88 per cent.
The Fed’s decision comes in the midst of a federal government shutdown that has delayed the collection and publication of key data on the labour market this month. Despite the dearth of economic stats, the Fed has said it is prioritising supporting the jobs market through lower borrowing costs over the risks of another resurgence in inflation caused by tariffs this year. The rate-setting committee said the “downside risks to employment rose in recent months” and Powell said the jobs market was “softer and less dynamic”.
Powell said the lack of data was the equivalent of “driving in the fog. There’s a possibility you can be more cautious”.
Official figures for September showed annual consumer prices hit 3 per cent for the first time since January last month. Powell said inflation remained “somewhat elevated” but tariffs were likely to have a “one-off” impact on prices. “Our task to ensure a one-off does not become a persistent inflation problem,” he said.
Economists and traders have begun relying on private sector surveys of the economy, which have shown signs of weakness this month. US consumer confidence has fallen to a six-month low this month, according to the Conference Board, with the lowest-income American households the most downbeat about their personal finances. A separate sentiment survey from the University of Michigan also hit a five-month low in October.
Michael Pearce, deputy chief economist at Oxford Economics, said the Fed would not cut interest rates until the first quarter of next year. “The unexpected hawkish dissent from a regional Fed president highlights that future moves are becoming more contentious,” he said.
Splits on the rate-setting committee come as the White House is currently interviewing five candidates to replace Powell as Fed chairman before the end of the year, to take up the post in the summer of 2026. President Trump has attacked Powell for not cutting interest rates fast enough this year. Bob Michele, chief investment officer at JP Morgan, said Powell was at risk of “losing his grip” on the committee.
The Fed also said it would be ending its quantitative tightening programme on December 1, where it has been selling US government bonds on its balance sheet back to investors — a measure that is likely to ease credit conditions after worries about the state of the private credit sector and the health of some regional banks.
Canada’s central bank cut interest rates by a quarter point on Wednesday, while the European Central Bank is expected to make no change to borrowing costs in the coming week.
Analysis
The Federal Reserve delivered no surprise with its second interest rate cut of the year, but its internal politics are becoming messy as President Trump watches on.
Two of the 12-members of the central bank’s Open Markets Committee dissented from the decision to reduce rates to 3.75-4 per cent. Stephen Miran, the president’s ally who has been temporarily appointed until January, wanted a bigger reduction of half a percentage point, as he did last month.
The White House wants far easier borrowing conditions to support growth and the labour market.
Jeffrey Schmid, president of the Kansas City Fed, who has not been a dissenter in previous votes, said rates should be unchanged. It is the first three-way split at the Fed since 2019.
The split and “strongly held views” on either side mean another rate cut in December is in serious doubt, Jerome Powell, the Fed chair, said, pushing back at the markets expectations that another easing was all but guaranteed. His hawkishness is also a step back from the Fed’s own “dot plot” of forecasts from last month which pointed to three consecutive cuts this year.
US rate-setters are having to work out what is going on in the economy in the absence of official data on the labour market due to the government shutdown. Powell admitted that the data vacuum, which is likely to extend into November, was a reason not to make any changes at its December meeting.
“What do you do if you are driving in the fog? You slow down. There’s a possibility you can be more cautious. I’m not committing to that,” Powell said.
“There’s an argument you slow down when you can’t see ahead. Others can also argue that things haven’t really changed. I hope we don’t face this and by the time of the December meeting we get a better flow of data.”
Bob Michele at JP Morgan, said: “The question for Powell is how blind are you flying?”