Insights A Closer Look: Fed Cuts Interest Rates as Inflation Lingers

The U.S. Federal Reserve lowered short-term interest rates by a quarter point at its monetary policy meeting on October 28–29. The Fed’s target range for the federal funds rate is now 3.75% to 4%. Since resuming interest rate cuts at its September meeting, the Fed has reduced rates by half a percentage point. For consumers, lower interest rates typically lead to lower credit card interest rates and borrowing costs for personal loans.

There were two dissents. Fed Governor Stephen I. Miran preferred a half-point reduction, while Kansas City Fed President Jeffrey R. Schmid preferred to leave the policy stance unchanged. The meeting statement by the Fed was largely the same as that of the previous meeting in September, except for some minor adjustments to account for the absence of key economic data due to the ongoing federal government shutdown. It’s worth noting that the Fed itself has continued to operate because its funding does not come from the Congressional appropriations process but from interest income on its securities portfolio.

Further Reductions in 2025 in Question

Most notably, Fed chair Jerome H. Powell stated in his prepared remarks during the post-meeting press conference that “[i]n the [Federal Open Market] Committee’s discussions at this meeting, there were strongly differing views about how to proceed in December. A further reduction in the policy rate at the December meeting is not a forgone conclusion—far from it.” In response, equity markets sold off. Futures markets, which prior to the meeting were pricing in a near 100% probability of another quarter point rate reduction in December, priced in only a 68% probability after the press conference.

The Impact, or Not, of Tariffs

Also during the press conference, Powell said that the 3.0% CPI inflation rate for September translates to 2.8% for the Personal Consumption Expenditures price index (both headline and core), which is the Fed’s preferred measure of inflation. He seemed to quantify the impact of tariffs at about 40 to 50 basis points, and added that this would mean core PCE inflation, excluding tariffs, is currently running at about 2.3% to 2.4%. Thus, assuming that the impact of tariffs is only one-time rather than repeating, inflation—with food, energy and tariffs stripped out—is not all that far from the Fed’s 2% objective.

Powell may have relied on a recent analysis by the St. Louis Fed that found tariffs had an annualized 40-to-50-basis-point impact on inflation during the June through August period. He did acknowledge that even though the rate of inflation has come down from the high levels set in 2021–22, prices have not, and continued to be problematic for many people, especially for low-income earners, or those at the bottom of what he characterized as a “K-shaped economy.”

Job Market and Unemployment

In response to a question about employment, Powell said that he did not think that weakness in the job market was accelerating. In that regard, he is backed up by a new metric recently introduced by the Chicago Fed that predicts what the unemployment rate is currently, similar to how the Atlanta Fed predicts GDP during periods between official reports. According to this new metric, the unemployment rate was 4.34% for September, and is currently clocking in at 4.35% for October. This is up only slightly from the 4.32% reported for August, before the government shutdown. 

Finally, it’s worth noting that the Fed also announced it would stop reducing the size of its securities portfolio as of December 1. There had been speculation that Fed Governor Michelle W. Bowman might dissent in favor of letting the portfolio continue to shrink, given her recent speech on monetary policy decision-making, but she voted along with the majority. It’s important to note that the size of the Fed’s portfolio is, at this point, strictly a technical matter related to the implementation of monetary policy but not otherwise related to the policy stance. Phrases such as “quantitative easing” or “quantitative tightening” have long become misnomers.