Federal Reserve to cut key rates on Wednesday, may signal another cut later

federal Reserve It will almost certainly cut its key interest rate on Wednesday and could signal it expects another cut in December as the central bank looks to boost hiring.

The cut made Wednesday would be the second this year and could benefit consumers by lowering the cost of borrowing for mortgages and auto loans. Since Fed Chairman jerome powell Strongly signaled in late August that a rate cut was likely this year, the average 30-year mortgage rate fell from 6.6% to about 6.2%, giving a boost to the otherwise sluggish housing market.

Still, the Fed is going through an unusual period for the U.S. economy and predicting its future moves is harder than would normally be the case. Hiring has virtually ground to a halt, yet inflation remains elevated, and much of the economy’s solid growth is dependent on massive investments by leading tech companies in artificial intelligence infrastructure.

The central bank is assessing these trends without much of the government data used to assess the health of the economy. The release of the September jobs report has been postponed due to the government shutdown. white House Last week it was said that inflation data for October would also not be compiled.

The shutdown could also cripple the economy in the coming months, depending on how long it lasts. About 750,000 federal workers are close to a month without pay, which could soon begin to weaken consumer spending, a key driver of the economy.

fired by federal employees trump The administration’s government efficiency department efforts earlier this year could formally show up in the jobs data if it is reported next month, causing the monthly hiring data to look even worse.

Powell said the risk of weak hiring is increasing, making it still as much of a concern as increased inflation. As a result, the central bank needs to move its key rate closer to a level that will neither slow down nor stimulate the economy.

Most Fed officials believe the current level of its key rate – 4.1% – is enough to slow growth and cool inflation, which has been their main goal since price increases reached a four-decade high three years ago. The Fed is widely expected to cut it to about 3.9% on Wednesday. With job gains at risk, the goal is to get rates down to less-restrictive levels.

Chris Dawsey, head of economic research at DE Shaw, an investment bank, said the lack of data during the shutdown means the Fed will likely stay on the same path it set in September, when it forecast cuts this month and in December.

“Imagine you’re driving in a winter storm and suddenly lose visibility in whiteout conditions,” Dossey said. “When you slow down the car, you will continue to move in the same direction you were going, whereas after losing visibility you make a sudden change.”

In recent comments, the Fed Chair has made it clear that the sluggish job market has become a significant concern.

“The labor market has actually softened quite a bit,” Powell said. “The downside risks to employment appear to have increased.”

Before the flow of data stopped due to the government shutdown on October 1, monthly hiring gains had dropped to an average of just 29,000 per month over the past three months. The unemployment rate rose from 4.2% in July to a still-low level of 4.3% in August.

However, layoffs also remain low, leading to what Powell and other officials have referred to as a “low-hire, low-fire” job market.

Also, last week’s inflation report – released more than a week late due to the shutdown – showed that inflation remains high but not accelerating and may not need higher rates to control it.

Yet a key question is how much longer the job market can remain in what Powell described as a “strange equilibrium.”

“There have been some worrying data points over the past few months,” said Stephen Stanley, chief U.S. economist at investment bank Santander. “Is this a weakening trend or are we just getting hit by air strikes?”

The uncertainty has led some top Fed officials to suggest they may not support a cut at their next meeting in December. At its September meeting, the Fed indicated it would cut three times this year, although its policymaking committee is divided. Nine of 19 officials supported two or fewer cuts.

Christopher Waller, a member of the Fed’s Governing Board and one of five people being considered by the Trump administration to replace Powell as Fed chair next year, said in a recent speech that while the hiring data is weak, other figures show the economy is growing at a healthy pace.

“So, something’s got to give,” Waller said. “Either economic growth softens to match the soft labor market, or the labor market rebounds to match strong economic growth.”

Since it’s not clear how the contradiction will play out, Waller said, “we need to proceed with caution when adjusting the policy rate.”

Waller said he supported a quarter-point cut this month, “but beyond that point” it would depend on what the economic data says, assuming the shutdown ends.

According to CME FedWatch, financial markets have put the chances of another cut in December above 90% — and Fed officials have said little so far to ease that expectation.

Jonathan Pingley, chief US economist ubsSaid he would watch if Powell reiterates his claim that the risks of a weak job market remain high at a news conference on Wednesday.

“If I hear it, I think they’re on track to lower rates again in December,” he said.