Divided US Fed supports rate cut for Q2 2025

The U.S. Federal Reserve on Wednesday announced its second straight quarterly interest rate cut to bolster a buoyant labor market, in a move that highlighted growing divisions within its ranks.

Policymakers voted 10-2 to cut the bank’s key lending rate to between 3.75 percent and 4 percent, the Fed said in a statement.

Opposing the action were Fed Governor Stephen Miran, who supported a larger cut of half a point, and Kansas City Fed President Jeff Schmid, who “preferred no change to the target range for the federal funds rate at this meeting,” the Fed said.

“We continue to face mutual risks,” Powell told reporters at a news conference in Washington.

He added that during the Fed’s discussions this week, “there were sharply divergent views on how to move forward in December.”

“A further cut in the policy rate at the December meeting is not a given, far from it,” Powell added.

Wall Street stocks fell after Powell poured cold water on the prospect of a rate cut in December.

The shutdown weighs on the economy

The decision to cut interest rates boosts the US economy as businesses continue to digest the effects of President Donald Trump’s sweeping tariffs and buys more time for policymakers as they await the end of the government shutdown.

Republicans and Democrats remain politically deadlocked nearly a month after the shutdown began, which suspended the release of nearly all official data.

“The federal government shutdown will weigh on economic activity while it continues, but those effects should reverse after the shutdown ends,” Powell said Wednesday.

“We will collect every scrap of data we can find, evaluate it and think about it carefully,” he added, referring to alternative forms of data released during the official data hiatus. “If you drive in fog, you slow down.”

Fed officials have flagged concerns in recent months that the labor market is cooling, prompting them to turn their attention to boosting hiring even as inflation remains above the Fed’s target.

“The Fed’s rate cut is a tactical error,” Moody’s Analytics head of banking industry Chris Stanley wrote in a note shared with AFP. “The data does not support a rate cut,” he continued, adding that the Fed could find itself back on tapering in the near term due to high inflation.

“The decision to cut rates by 25 basis points in October was never in doubt, but the unexpected hawkish dissent from a regional Fed chair highlights that future moves are becoming more controversial,” Oxford Economics deputy chief economist Michael Pearce wrote in a note to clients.

“We expect the Fed to slow the pace of cuts from here,” he added.

Fed to end QT

The Fed also announced on Wednesday that it will soon end its policy of shrinking the size of its balance sheet, a move that was also widely expected.

“The Commission has decided to complete its reduction in overall securities on December 1,” the Fed said in a statement confirming its decision.

The Fed’s balance sheet soared in the early days of the Covid-19 pandemic and has gradually declined in recent years.

“I think they are very cautious about the pressures on the financial markets,” former Cleveland Fed President Loretta Mester told AFP ahead of the interest rate announcement, referring to the expected end of the Fed’s quantitative easing.

“They could probably reduce the balance sheet a bit more,” he added. “But I don’t think there’s much appetite for it.”