For the second time in a row, the Fed cut its key interest rate by 0.25 percentage points – despite unclear economic data resulting from the shutdown. Chairman Jerome Powell is caught between inflation concerns, fears of recession, and political pressure from the White House.
Concerned about the labor market, the US Federal Reserve cut its key interest rate for the second time this year. It reduced the rate by 0.25 percentage points to a range of 3.75 to 4.0 percent, the Federal Reserve Board announced Wednesday in Washington. A large majority of economists had expected this move. The vehement demands of US President Donald Trump for interest rate cuts likely played a role.
Although inflation rose to 3.0 percent in September, significantly exceeding the Fed's medium-term inflation target of 2.0 percent, this would normally argue against an interest rate cut. However, experts had feared an even stronger increase, suggesting that concerns about the US labor market likely outweigh the inflation issue. The Fed justified its last interest rate cut by citing the weak labor market. Since then, however, crucial economic data has been missing, either not released or delayed due to the ongoing US shutdown. An end to the fiscal moratorium is not yet in sight.
The interest rate cut is likely to weaken the dollar – which could make vacations in the US and business transactions in US currency more attractive. One euro would then buy slightly more dollars. US President Donald Trump favors a weaker currency, arguing that if it's too strong, it discourages additional business and foreign tourists from visiting the country. While this is true in principle, it also poses a problem in the fight against inflation: for Americans, it means, among other things, that they will have to pay more for imported goods and travel abroad.
The second interest rate cut of 2025 – and possibly not the last.
In September, the Federal Reserve's central bank council cut its key interest rate by one step – 0.25 percentage points – for the first time in nine months. At the time, the council indicated that further cuts were possible, with up to two rate reductions being a possibility. Analysts expect the key interest rate to be eased again at the December meeting – the last one this year. According to the Fed, another cut could then occur in 2026.
Of the twelve voting members, ten voted for a one-step rate cut. Surprisingly, member Jeffrey Schmid of the Kansas City Federal Reserve Bank advocated maintaining the current rate range. Trump confidant Stephen Miran, on the other hand, again argued for a larger cut—entirely in line with the president's wishes. Critics like Democratic Senator Elizabeth Warren question Miran's independence and accuse him of being"Trump's puppet." Miran denied this.
Trump's influence on the Fed
Trump nominated Miran for the position after it suddenly became vacant. The president is attempting to exert more influence over the central bank, not only through his advisor, but also through the Federal Reserve, which is supposed to decide on monetary policy independently of political pressure. For months, the Fed has faced Trump's accusation that it is cutting interest rates too late.
If Trump had his way, Fed Chair Jerome Powell would have resigned long ago. The US president holds him personally responsible for the Fed keeping interest rates stable for months instead of lowering them. However, a twelve-member board decides on the key interest rate, and it is unclear whether a president is allowed to dismiss the Fed chair.
Powell's term ends in May 2026. Treasury Secretary Scott Bessent plans to present Trump with a list of potential successors after Thanksgiving on November 27. The president aims to make a decision by the end of the year.
On his path to a less independent Fed board, Trump also targeted Fed Governor Lisa Cook, alleging she was involved in mortgage fraud. Cook denies any wrongdoing. The case is now before the US Supreme Court, where Trump recently suffered a setback in his attempt to remove her, but the final decision has not yet been made.
