Key points:
- The Federal Reserve’s Federal Open Market Committee voted to cut the federal funds target by 25 basis points, to a range between 4.0% and 4.25%.
- This cut signals support for the labor market amid growing concerns, even as inflation remains well-above the Fed’s 2% target.
While its fight against inflation is far from over, the Federal Reserve made a clear choice today to prioritize the employment side of its dual mandate and take strong action to stimulate and shore up an increasingly vulnerable labor market. The US labor market has shown incredible resilience in the post-pandemic era despite numerous recession predictions, a banking crisis, geopolitical turmoil, and rising uncertainty. But these factors, paired with several years of gradual cooling, are adding up. Year-to-date job gains are the worst since 2010 (excluding the pandemic), and concerns for the labor market’s health are rising. Unemployment and layoffs are relatively stable at historically low levels, which is encouraging, but they are unlikely to stay that way if labor market conditions deteriorate further.
Rate cuts can stimulate the economy by lowering borrowing costs for businesses and consumers and could lead to increased investment, hiring, and/or spending. However, rate cuts also risk overstimulating the economy and may lead to further increases in prices and inflation. And broad uncertainty around labor market health, tariff impacts, inflation, and the path of any future rate cuts remains. The Fed’s preferred inflation measure came in at 2.9% in July (considerably above the committee’s 2% target), highlighting a growing tension between the Fed’s dual mandate to keep Americans in jobs and prices stable. Going forward, the Fed will have to navigate the possibility that inflation stays elevated in the midst of declining labor market conditions. A cut today doesn’t necessarily imply we will see additional cuts in the coming months.
