The U.S. Federal Reserve has announced a second interest rate cut this year in an effort to boost economic growth and employment despite ongoing high inflation. In a statement released on Wednesday, the Fed acknowledged a slowdown in job gains and a slight increase in the unemployment rate up to August, with recent indicators reflecting these trends.
Due to a federal shutdown that began on October 1, the government has not released any unemployment data post-August, prompting the Fed to rely on private-sector data. The latest decision has brought the Fed’s key rate down to approximately 3.9% from 4.1%, after raising it to around 5.3% in 2023 and 2024 to combat significant inflation levels.
The reduction in interest rates could potentially lead to lower borrowing costs for mortgages, auto loans, credit cards, and business loans over time. The move by the central bank comes at a challenging period marked by slow hiring and persistent inflation above the Fed’s target of two percent.
Facing a lack of crucial economic indicators from the government due to the shutdown, including reports on employment, inflation, and consumer spending, the Fed may consider further rate cuts in December. The uncertainty surrounding future actions is heightened by the absence of key data.
Traditionally, the Fed raises short-term rates to tackle inflation and lowers them to stimulate borrowing, spending, and employment. Currently, the dual objective of supporting the job market while managing inflation poses a significant challenge, leading to a delicate balance in adjusting borrowing costs to achieve these goals effectively.