Additional Coverage:
Federal Reserve Poised for Rate Cut Amidst Government Shutdown and Cooling Inflation
Washington D.C. – The Federal Reserve is widely anticipated to implement another interest rate cut this Wednesday, despite a near-total blackout of federal economic data stemming from the ongoing government shutdown. A crucial report released last Friday, however, provided a key indicator for the central bank’s decision: the Consumer Price Index (CPI).
The CPI report revealed that the inflation rate climbed to 3% last month, a figure that was cooler than economists had predicted. This suggests that the economic impact of President Trump’s extensive tariffs has been more subdued than initially forecasted.
Economists are largely interpreting this softer inflation data as a green light for a rate cut. Scott Helfstein, Global X’s head of investment strategy, noted in an email Friday, “Concerns about tariffs driving prices higher are still not showing up in most categories.
Nothing in the inflation print should stop the Fed from cutting rates next week. Yes, prices are higher, but not enough to keep them from helping the economy.”
According to CME FedWatch, which bases its projections on 30-Day Fed Funds futures prices, there is a 96.7% probability that the Fed will lower its benchmark rate by 0.25 percentage points on Wednesday. Such a reduction would bring the benchmark rate to a range of 3.75% to 4%, down from its current 4% to 4.25%, marking the second rate cut this year.
Rationale Behind the Rate Cut
The Federal Reserve operates under a “dual mandate” to maintain both low inflation and low unemployment. Historically, when inflation escalates, such as the 40-year high of 9.1% in June 2022, the Fed raises interest rates to make borrowing more expensive. This action aims to curb consumer and business spending, thereby tempering inflation.
Conversely, a weakening labor market can be invigorated by lower interest rates. Reduced borrowing costs enable businesses to expand and hire more employees.
Federal Reserve Chair Jerome Powell indicated a growing concern about a significant slowdown in the labor market when he announced the Fed’s first rate cut of 2025 last month. He stated, “In this less dynamic and somewhat softer labor market, the downside risks to employment appear to have risen.”
While the September jobs report was not released due to the federal shutdown, Powell acknowledged the data halt in an October 14th speech. He assured that the central bank still has access to “a wide variety of public- and private-sector data that have remained available,” and that “the outlook for employment and inflation does not appear to have changed much since our September meeting.”
Bank of America economists reinforced this sentiment in a Friday research report, stating that the CPI report “should keep the Fed focused on the labor market in terms of the near-term policy trajectory. In the absence of the September jobs report, an October cut appears to be a done deal.”
Potential Impact on Your Finances
While a quarter-point rate cut may seem modest, it follows September’s reduction, and economists are anticipating a third cut at the December meeting. Collectively, this could mean the benchmark rate by year-end is 0.75 percentage points lower than it was in January.
Such a cumulative reduction would likely translate to lower interest rates for credit cards and loans like home equity lines of credit (HELOCs). These credit products are tied to the prime rate, which in turn is influenced by the Fed’s benchmark rate.
Mortgage rates have already seen a dip in anticipation of the Fed’s decision. While the Fed doesn’t directly set mortgage rates, its policy actions and bond market expectations for economic growth and inflation significantly influence them.
As of October 23rd, the average 30-year fixed-rate mortgage fell to 6.19%, reaching its lowest point in a year, according to Freddie Mac. However, homebuyers might not see substantial further relief in the immediate future.
Realtor.com’s chief economist, Danielle Hale, explained in an email, “Mortgage rates have moved down notably in advance of the Fed’s meeting, hitting their lowest level in more than a year, but further declines will depend on new developments. The Fed’s decisions are anticipated by the market, which means that the upcoming rate cut and several more over the next few months are already largely priced in.”