The U.S. Federal Reserve is widely expected to announce a 25 basis point interest rate cut today, lowering the benchmark federal funds rate to 3.75%-4.00% — the second cut this year. But with inflation climbing to 3% in September, a struggling job market, and a government shutdown blocking critical data, Fed Chair Jerome Powell faces one of the toughest decisions in recent memory.
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Inflation Up, Jobs Down — A Fed in the Middle:
September’s Consumer Price Index (CPI) rose to 3% year-over-year, up from 2.9% in August, according to the Bureau of Labor Statistics. Core inflation — excluding food and energy — also hit 3%, driven by higher costs in gasoline, housing, clothing, and electricity. Many experts point to President Trump’s tariffs as a major culprit, calling them the largest tax hike since the 1960s. Import duties now averaging 17% have already pushed up prices on apparel and durable goods, with more increases likely ahead.
At the same time, the U.S. labor market is showing serious cracks. Unemployment stands at 4.3% — a four-year high — with over 7.4 million people out of work. Job searches now take nearly six months on average, the longest stretch since the 2008 financial crisis. Hiring has collapsed to levels not seen in over a decade. Private payroll reports show sharp drops in employment, though they only cover part of the workforce and miss government jobs.
The ongoing government shutdown — now in its fourth week — has made everything worse. Key reports like September’s jobs numbers and the Fed’s preferred inflation measure (PCE index) are delayed. The last PCE reading from August was already above 2%. Without fresh official data, the Fed is flying blind, relying on incomplete private surveys.
Powell: “No Risk-Free Path”
Fed Chair Jerome Powell has been clear about the challenge. “There is no risk-free path for policy as we navigate the tension between our employment and inflation goals,” he said earlier this month.
Fed Governor Christopher Waller, seen as a possible future chair, echoed the concern: “Something’s gotta give.” He noted that either economic growth must slow to match the weak job market, or hiring must pick up to align with strong GDP estimates near 4%, fueled largely by AI investments. Stock markets keep hitting records, also driven by AI hype and hopes for lower rates — but many fear a bubble.
Even Waller, who wanted faster rate cuts in the summer, now urges caution: “We need to move with care to avoid mistakes that will be costly to correct.”
Shutdown Adds Fuel to the Fire:
The government shutdown, triggered by budget disputes, has furloughed hundreds of thousands of federal workers, closed national parks and museums, and put food assistance for 41 million people at risk. Air traffic controllers and border agents are working without pay. States are pausing aid programs. The longer it lasts, the greater the risk of a broader economic slowdown.
What’s Next?:
Markets are 97-99% certain of today’s rate cut. Another is possible in December, potentially bringing the rate down to 3.50%-3.75% by year-end. Powell will announce the decision at 2 p.m. ET, followed by a press conference.
Lower rates could ease pressure on credit card debt and mortgages. But rising prices from tariffs may cancel out some relief. As one analyst said: the Fed’s job has never been more complicated.
