United States: The Fed Lowers Rates but is Becoming Increasingly Divided

The Federal Reserve (Fed) lowered interest rates for the second consecutive time on Wednesday, a decision that was not unanimous among its members. The Fed's chairman warned that further easing was 'far from certain' for the next meeting.

The quarter-point reduction brings the key rates to a range of 3.75% to 4%. This is the second easing of the year, with the first occurring at the previous meeting in September.

This action, widely anticipated by financial markets, is notable as two of the twelve voters opposed it. Governor Stephen Miran, recently appointed by President Donald Trump, advocated for a more substantial cut of half a point, a stance he had publicly expressed.

Meanwhile, the president of the Kansas City Fed, Jeffrey Schmid, opposed any easing at all, indicating earlier this month that he believed inflation was too high to relax monetary policy further.

Fed officials are even more divided on the approach to take during the next meeting on December 9 and 10, according to Chairman Jerome Powell at a press conference. "An additional rate cut at the December meeting is not guaranteed, far from it," he stated.

This somewhat dampened the hopes of financial markets, which were betting heavily on continued accommodative policy. Wall Street, which was initially rising, reversed course after this announcement, with indices closing mixed.

"A rate cut in December still remains highly probable. None of the Fed officials want to bear the responsibility for a slowdown or recession," reacted Heather Long, an economist at Navy Federal Credit Union, who fears an increase in layoffs.

The Fog of the 'Shutdown'

To justify its decision, the Fed highlighted the increasing risks in the labor market "in recent months" in its statement. Job creation has collapsed without affecting the unemployment rate, in an economy disrupted by tariffs imposed by the administration and a tough immigration policy that reduces the number of workers and consumers in the country.

In this context, American central bankers have lost some of their bearings. After struggling to gauge the impact of the tariff shock, they have recently lacked the official indicators produced by government services due to the ongoing budget paralysis ("shutdown").

Jerome Powell noted that this deadlock, which halts the payment of salaries to hundreds of thousands of civil servants, will "weigh on economic activity," but he estimated that "this impact should be offset when the shutdown ends."

The central bank also indicated that it would stop its so-called quantitative tightening policy on December 1. Until now, it had not systematically renewed its holdings as they matured, such as government bonds, significantly reducing its balance sheet that had exploded during the Covid-19 pandemic.

By resuming its purchases, it injects liquidity back into the economy, which supports it. "This decision is a major support for the bond market but also signals the committee's growing concerns about the labor market," commented Florian Ielpo, head of macroeconomic research at Lombard Odier IM.

While Donald Trump has constantly called for rate cuts since returning to power in January, his desire to influence monetary policy has been less pronounced this time. His economic advisor, Governor Miran, is on board, and the Supreme Court has not allowed Mr. Trump to immediately revoke another official, Governor Lisa Cook.

The head of state has also given Jerome Powell a bit of breathing room, whom he had sought to push out. He is now evaluating candidates to potentially replace him at the end of his term in the spring.

AFP