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On Wednesday (October 29), the Federal Reserve announced a quarter-point cut to its benchmark interest rate, marking the second reduction this year. This decision aims to provide financial relief to consumers and businesses but comes amid concerns over rising inflation. In a statement, the Fed noted that while economic activity is expanding, job growth has slowed, and inflation has increased.
Fed Chair Jerome Powell addressed the ongoing government shutdown, which began on October 1, stating it could further impact economic activity. He mentioned that deadlines for funding food assistance and salaries for federal workers are imminent, with Congress still in a stalemate.
The interest rate cut is intended to lower borrowing costs across the economy, affecting auto loans and credit cards. Although mortgage rates are not directly tied to the Fed's benchmark rate, they often move in parallel. Despite a slowing labor market and rising prices, stock markets have surged, driven by an artificial intelligence investment boom. Notably, Nvidia recently became the first company valued at $5 trillion.
Looking ahead, the Fed's next rate decision is scheduled for December 10. While investors anticipate another quarter-point cut, Powell emphasized that future rate changes are not predetermined. "Policy is not on a preset course," he stated.
The Fed faces a dilemma with weakening employment data and persistent inflation. The Bureau of Labor Statistics reported a rise in the annual inflation rate from 2.9% to 3% in September, exceeding the Fed's 2% target. The government shutdown has complicated matters by halting the release of fresh economic data.
Economists attribute some inflationary pressures to tariffs imposed by President Donald Trump. Additionally, the labor market is experiencing challenges, with an unemployment rate of 4.3% as of August and lengthy job search durations. The Fed's task is further complicated by the lack of current data, as noted by economists from BNP Paribas.