According to a report from The Associated Press, The Federal Reserve cut its key interest rate Wednesday for a second time this year as it seeks to shore up economic growth and hiring even as inflation stays elevated.
“Job gains have slowed this year, and the unemployment rate has edged up but remained low through August,” the Fed said in a statement issued Wednesday. “More recent indicators are consistent with these developments.” The government hasn’t issued unemployment data after August because of the shutdown. The Fed is watching private-sector figures instead.
Wednesday’s decision brings the Fed’s key rate down to about 3.9%, from about 4.1%. The central bank had cranked its rate to roughly 5.3% in 2023 and 2024 to combat the biggest inflation spike in four decades. Lower rates could, over time, reduce borrowing costs for mortgages, auto loans, and credit cards, as well as for business loans.
The move comes amid a fraught time for the central bank, with hiring sluggish and yet inflation stuck above the Fed’s 2% target. Compounding its challenges, the central bank is navigating without the economic signposts it typically relies on from the government, including monthly reports on jobs, inflation and consumer spending, which have been suspended because of the government shutdown. The Fed has signaled it may reduce its key rate again in December but the data drought raises the uncertainty around its next moves.
The Fed typically raises its short term rate to combat inflation, while it cuts rates to encourage borrowing and spending and shore up hiring. Right now its two goals are in conflict, so it is reducing borrowing costs to support the job market, while still keeping rates high enough to avoid stimulating the economy so much that it worsens inflation.
Speaking to reporters after the Fed announced its rate decision, Fed Chair Jerome Powell said there were “strongly differing views about how to proceed in December” at the policy meeting and a further reduction in the benchmark rate is not “a foregone conclusion.”
On Wednesday, the Fed also said it would stop reducing the size of its massive securities holdings, which it accumulated during the pandemic and after the 2008-2009 Great Recession. The change, to take effect Dec. 1, could over time slightly reduce longer-term interest rates on things like mortgages but won’t have much impact on consumer borrowing costs.
The Fed purchased nearly $5 trillion of Treasury securities and mortgage-backed bonds from 2020 to 2022 to stabilize financial markets during the pandemic and keep longer-term interest rates low. The bond-buying lifted its securities holdings to $9 trillion.
In the past three years, however, the Fed has reduced its holdings to about $6.6 trillion. To shrink its holdings, the Fed lets securities mature without replacing them, reducing bank reserves. In recent months, however, the reductions appeared to disrupt money markets, threatening to push up shorter-term interest rates.
Click here to read the full report from The Associated Press.
