Federal Reserve cuts key interest rate

The Fed purchased nearly $5 trillion ($7.6 trillion) in Treasuries and mortgage-backed securities from 2020 to 2022 to stabilize financial markets and keep long-term interest rates low during the pandemic. Bond buying increased securities holdings to $9 trillion.

But over the past three years, the Fed has reduced its assets to approximately $6.6 trillion. To shrink its holdings, the Fed reduces bank reserves by allowing securities to mature without being rolled over. But recent months have seen the cuts disrupt money markets and threaten to push up short-term interest rates.

Two of the 12 officials who voted on the Fed’s interest rate decisions opposed it, but in different directions. Fed Governor Stephen Miran opposed the half-point cut for the second consecutive meeting. Miran was appointed by President Donald Trump just before the central bank’s last meeting in September.

Federal Reserve Bank of Kansas City President Jeffrey Schmid voted against the move because he preferred the Fed to keep interest rates unchanged. Schmid has previously expressed concerns that inflation remains too high.

Trump has repeatedly attacked Powell for not lowering borrowing costs faster. Earlier on Wednesday, South Korea repeated its criticism of the Fed chairman.

“He’ll be out of there in a few months,” Trump said. Powell’s term ends in May. On Monday, Treasury Secretary Scott Bessent confirmed that the administration is considering five replacements for Powell and will make a decision by the end of this year.

Meanwhile, the government shutdown disrupted economic data. The September employment report, which was scheduled to be released three weeks ago, has still been delayed. This month’s hiring numbers, due on November 7, will likely be delayed and less comprehensive when they are finally released. And the White House said last week that the October inflation report may never be released.

The data drought raises risks for the Fed as it is expected to continue lowering interest rates to support growth and employment. However, if employment gains pick up soon, the Fed may not be able to detect this change. And if hiring picks up after weak summer job gains, further rate cuts may not be justified.

Before the Oct. 1 government shutdown cut off the data flow, monthly hiring gains had averaged just 29,000 in the previous three months, according to Labor Department data. The unemployment rate increased from 4.2 percent in July to 4.3 percent in August.

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More recently, several major companies, including UPS, Amazon, and Target, have announced sweeping layoffs with the threat that the unemployment rate will rise if they continue.

Meanwhile, last week’s inflation report, released more than a week late due to the lockdown, showed inflation remained high but was not accelerating and may not need higher interest rates to rein it in.

The government’s first report on economic growth in the July-September quarter was scheduled for release on Thursday, but will be delayed, as will Friday’s consumer spending report, which includes the Fed’s preferred measure of inflation.

Fed officials say they monitor a range of other data, including some released by the private sector, and do not feel disadvantaged by the lack of government reporting.

More to come

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