The Federal Reserve is expected to announce a second interest rate cut on Wednesday during 2025, despite ongoing uncertainty regarding the health of the U.S. economy due to the ongoing government shutdown.
This meeting will be the second-to-last for the Federal Reserve this year amid a prolonged political conflict between Republicans and Democrats over healthcare support, which has halted the release of most official economic data.
As a result, central bank officials will have to make decisions on interest rates without relying on the comprehensive information that this data typically provides.
Expected Cut of a Quarter Percentage Point
Analysts anticipate that the Fed will move forward with a rate cut of 25 basis points, bringing the target range to between 3.75% and 4.00%, without indicating their stance on a potential final cut this year in December.
Internal Disagreement on Job Support and Inflation Control
The lack of data complicates discussions within the Fed about whether it is better to quickly lower rates to support the sluggish labor market or to keep them high to face inflation, which remains above the target of 2%, partially fuelled by tariffs imposed by President Trump on key trading partners.
The Fed has a dual mandate from Congress to address inflation and unemployment through adjustments to interest rates.
Joseph Gagnon, a former Fed official, stated that they need to determine whether the expected inflation is still on track or if it will simply not materialize, which is the major dilemma currently.
He added that the prevailing argument is that current inflation is temporary, but the weakness in the labor market may persist longer, which will influence the decision this month.
Limited Data and Positive Market Sentiment
Since the shutdown began on October 1, only one report on consumer inflation has been published, showing a 3.0% increase in prices over the twelve months ending in September. This data was slightly below expectations, contributing to the rise of financial markets to new record levels.
Although the Fed uses a different measure to estimate inflation, that measure is also still above the target level according to recent data. Regarding employment, job growth has sharply declined, with only 22,000 jobs added in August, while the unemployment rate stabilized around 4.3%, a historically low level.
Political Pressures from the White House
This year, the Federal Reserve has faced increasing political pressure from the Trump administration, which has repeatedly criticized Fed Chair Jerome Powell through the “Truth Social” platform, noting that Powell’s term ends next year.
The administration has also sought to remove Board Member Lisa Cook over allegations related to mortgage fraud. Cook has challenged the case, which has reached the U.S. Supreme Court, scheduled to hear arguments in January.
It is not expected that the court will issue a decision before the end of February, which is the deadline for the Fed to reappoint regional bank presidents, a process that occurs every five years.
