The Federal Reserve (Fed) will announce its latest interest rate decision on Wednesday (October 29). The market generally expects the Fed to cut rates by another 25 basis points, bringing the benchmark interest rate down to 3.75% to 4%. Currently, the U.S. economy is facing dual pressures of a sluggish labor market and rising inflation rates, forcing the Fed to make difficult decisions between “preventing an economic recession” and “maintaining inflation stability”.
If the Fed decides to cut interest rates on Wednesday, it will be the second consecutive rate cut since September. The market expects another rate cut in December.
The loose monetary policy is currently boosting the stock market: last week, the Dow Jones Industrial Average broke through 47,000 points for the first time, while the S&P 500 and Nasdaq indexes also hit new highs. However, on the other hand, the inflation rate has consistently been above the Fed’s 2% target. The latest September Consumer Price Index (CPI) showed an annual increase of 3%, indicating that price pressures have not eased.
Due to the government shutdown, the September jobs report has been indefinitely postponed. Summer data shows a slowdown in job growth, with the manufacturing sector contracting for seven consecutive months. Economists point out that these signs will prompt the Fed to lean towards a rate cut to support the economy.
Fed Chairman Jerome Powell made it clear in a speech last week that based on current data and communication with businesses, core trends like weak employment have not changed. “The uncertainty of the economic outlook remains high, and the Federal Open Market Committee (FOMC) is highly attentive to the dual risks faced in fulfilling its dual mandate, judging that the downside risks to the labor market have increased.” Powell’s stance was interpreted by Deutsche Bank’s Chief U.S. Economist Matthew Luzzetti as a clear reason for an October rate cut.
Senior economist Ryan Young from the Competitive Enterprise Institute pointed out: “A 3% inflation rate is usually enough to prompt the Fed to raise rates to bring inflation closer to its 2% target.”
However, a rate cut will have a positive impact on federal debt interest expenses. As of the end of September, the total U.S. public debt has exceeded $38 trillion, with interest payments alone exceeding $1 trillion for the past fiscal year. EJ Antoni, Chief Economist of the Heritage Foundation, warned that the Treasury Department is forced to engage in short-term borrowing due to high interest rates, making the debt structure more fragile. “We can only keep rolling over short-term debt, hoping that the Fed will cut rates soon so that the government can lock in lower rates,” he said.
Nevertheless, Antoni also cautioned that a Fed rate cut does not necessarily mean market interest rates will decrease. “If Congress engages in large-scale spending again, accelerating borrowing, even if the Fed cuts rates, bond rates could rise instead.”
Former Fed Governor Kevin Warsh, one of the candidates under consideration by the Trump administration to replace Powell, criticized the current decision-making team for losing market trust in an interview on Fox Business Channel on Monday (October 27). “Most households and businesses believe that inflation will remain far above 2%, caused by the Fed. Unless there is institutional reform at the Fed, unless new leaders emerge, and a new operational framework is established, mistakes will only be repeated.”
Warsh emphasized, “What truly advances inflation is not the Fed, but the president’s economic policies.” “His (Trump’s) policies have strengthened the economy and lowered prices. Unfortunately, the Fed is going in the opposite direction. To be honest, I completely understand his frustration,” Warsh added.