Faced with fears of an economic slowdown and the risk of runaway prices, the Federal Reserve (Fed) has opted for the former. The US central bank decided on Wednesday to lower interest rates by 0.25 percentage points to a range of between 3.75% and 4%. This is the second consecutive rate cut, following a similar one in September, aimed at stimulating economic activity.

Federal Reserve Chairman Jerome Powell has left the door open for the Fed to take a breather at its next meeting in December before deciding whether to raise interest rates again. Powell also addressed the division within the Fed, with some members advocating for more aggressive cuts and others for holding back. “We continue to face risks on both sides,” Powell said Wednesday during the press conference following the Board of Governors meeting. “In the Committee discussions during this meeting, there were very divergent views on how to proceed in December. Another cut in the policy rate at the December meeting is not a foregone conclusion. Not by a long shot,” the Washington, D.C.-born economist emphasized, highlighting the differences among the Fed's board members.

“We haven’t made a decision about December yet. I always say that we don’t make decisions in advance, but in this case, I want to add that it’s not an inevitable conclusion. In fact, it’s far from it,” he insisted.

Those words have triggered a reaction in the financial markets. The S&P 500 industrial index reversed course, going from gains during the session to losses of almost half a point. The tech-heavy Nasdaq deepened its losses, falling 2.4%.

Signs of a slowdown in the growth of the world's largest economy are beginning to accumulate despite the US government's statistical blackout. Dozens of federal agencies have closed or are operating at reduced capacity due to the inability of Republicans and Democrats to negotiate a budget extension. Even so, the latest data points to a slowdown in the labor market. Consumer confidence deteriorated in September for the third consecutive month and is now below last year's levels, according to the indicator published yesterday. Contributing factors include concerns about the job market, the cost of living, and a significant increase in uncertainty surrounding the tariffs approved by US President Donald Trump.

Federal Reserve officials warned at the previous meeting of the complex balance between inflation and the health of the labor market. Indeed, the stability of these two variables constitutes the mandate of those responsible for US monetary policy.

Downward revisions to US employment figures show a sharper-than-expected decline in job creation. Despite this, the unemployment rate remains historically low at 4.3%, a rate economists call full employment. Analysts explain that this apparent divergence stems from a reduction in the labor supply due to Trump's stricter immigration policies. There are few hires, but also few layoffs. In short, companies are signing fewer contracts, but there are fewer people willing to work. It remains to be seen how long this paradox can be sustained.

These uncertainties are also spreading to the housing market. Home prices in the United States fell to their lowest level in two years last August, according to data from S&P Realty Case-Shiller published this Tuesday. The real estate market risks slowing even further following the layoff of thousands of federal workers due to Trump's austerity policies and the consequences of the government shutdown, which is preventing hundreds of thousands of public employees from receiving their paychecks.

“For a long time, the risk to both targets (inflation and employment) was clearly toward higher inflation. But that has changed. As we saw, particularly after the July meeting, we observed downward revisions to job creation and a very different outlook for the labor market, suggesting greater downside risks to employment than we had anticipated,” Powell added.

“This indicated that monetary policy, which we had maintained at a level I would say was slightly restrictive (others would say moderately), should evolve towards a neutral position. If both objectives are equally at risk, the ideal would be to maintain a neutral position, because one requires an increase and the other a reduction. Therefore, if equilibrium is restored, the logical course would be to maintain a neutral position,” he noted, leaving the door open to not changing interest rates in December.

This Thursday, the US economic growth figures for the third quarter will be released, providing a quantifiable measure to the widespread economic unease. The United States risks falling into stagflation, a period of low growth and high inflation, which is devastating for the finances of citizens and businesses.

Meanwhile, inflation shows no signs of letting up; last September it climbed one-tenth of a percentage point to 3%, the highest level since last January. Core inflation, which excludes the most volatile items in the consumer basket, such as fresh food and energy, also climbed to 3%, above the Federal Reserve's target.

Uncertainty about the real consequences that tariffs will have on the economy is affecting businesses. Many managed to cushion the impact by anticipating purchases and reducing margins in the previous quarter. But inflation will come under further pressure and the economy could cool down as the effectiveness of that strategy begins to wane and companies start passing on the increased costs from import duties to prices.

We will have to wait for the next meeting of the Federal Open Market Committee (FOMC), the Fed body that decides on interest rates, to see how concerns have changed among these opposing forces: rising inflation and economic slowdown.

The meeting took place in a tense atmosphere amid growing pressure from President Trump to control the Federal Reserve. The Republican has been waging a campaign of harassment and intimidation against Fed Chairman Jerome Powell for months, repeatedly insulting and disrespecting him in an effort to force his resignation. The White House occupant wants a more aggressive monetary policy that further cuts interest rates to accelerate economic activity, with just over a year to go before the midterm elections, which could reduce Republican power.

So far, Trump has already placed one of his acolytes, Stephen Miran, a former member of the president's advisory council, on the Federal Reserve's governing board. At the Fed's previous meeting, Miran voted against cutting rates by a quarter of a point because he wanted a more aggressive cut, according to minutes released a couple of weeks ago. At this meeting, he voted for a half-percentage-point cut. Another governor, the president of the Federal Reserve Bank of Kansas, Jeffrey R. Schmid, voted to maintain interest rates at their current level.

Powell emphasized that there are differing views within the Federal Reserve. “These divergent opinions revolve around the future, what it will look like… There are different forecasts and expectations about the economy, as well as different levels of risk tolerance. If you read the seven speeches, you’ll see that there are different points of view on the Committee, to the point that I myself said what I said,” he noted during the press conference.

“I think that for some members of the Fed’s Open Market Committee, the body that decides on interest rates, it may be time to reconsider whether there are truly downside risks to the labor market,” Powell noted, in a clear allusion to Miran, who advocates for a more aggressive approach. “Some felt the need to pause, while others wanted to keep going. That’s why I say there are divergent opinions, very divergent ones. Let’s just say that each person has a different risk tolerance. This leads to disparate viewpoints,” he elaborated.

Balance sheet reduction

The other issue on the table at Wednesday's meeting was deciding on a date to end the Fed's balance sheet reduction program. In recent crises, particularly the pandemic, the central bank purchased U.S. Treasury bonds and other mortgage-backed securities to ensure liquidity in the financial system during times of turbulence. But the Fed has been reducing its balance sheet for two years to restore financial equilibrium.

Since 2022, its assets have fallen from $9 trillion to $6.6 trillion. Powell had hinted that he planned to bring the end of this program forward to the first quarter of 2026, but market tensions led analysts to speculate that he might end it at this meeting. The board of governors, however, explains in the statement that the program will end in December of this year.