The Fed cut interest rates by another quarter percentage point at its October meeting. Investors had widely anticipated that the central bank would cut again this month despite the recent lack of official government data releases that the Fed usually relies on in making its decisions.
The 25-basis-point reduction brought the central bank’s benchmark federal funds rate to a range of 3.75%–4.0%—its lowest in almost 3 years.
In addition to the announcement on rates, the Fed indicated it is close to stopping its process of reducing its balance sheet. Here's more on what these announcements mean for you.
Amid low visibility, the Fed sticks to its course
The Fed always considers a broad range of data points in making its decisions. But official federal government data releases are the gold standard, the Fed has said.
For the most part, those data releases stopped abruptly this month due to the federal government shutdown. The Fed got a glimpse of federal inflation data last week, when the Bureau of Labor Statistics released a delayed Consumer Price Index report that showed inflation running at a 3% pace in September. (Certain federal workers were recalled to compile the release, which is used to calculate the annual Social Security cost-of-living adjustment.) But there has been no update to the unemployment rate or to payroll growth since early September.
That low visibility may be less than ideal. Even so, the Fed still had enough momentum coming out of its September meeting—when most FOMC members stated they expected multiple rate cuts before year end—to continue on its cutting course for now.
The job market had shown clear softening in the last few data releases before the shutdown. And the fed funds rate has still been high enough to be considered “restrictive”—meaning, high enough to have a drag on the economy and potentially weigh on the labor market.
“Given the weakness they’ve already seen in payrolls, the Fed still wants to bring rates down closer to a neutral level,” meaning a level at which rates neither accelerate nor weigh on the economy, says Andrew Garvey, the lead monetary policy analyst on Fidelity’s Asset Allocation Research Team.
How much further may rates fall?
While the Fed had enough momentum for this rate cut, the lack of new data is making it harder to understand where policy may go next.
In particular, one key question for policymakers is whether the job market continues to soften or has stabilized, says Kana Norimoto, macro strategist on Fidelity’s fixed income research team.
Federally reported data isn’t the Fed’s only source of economic information. It also gathers data and anecdotal evidence from its 12 regional Reserve Banks. And some private companies report on payroll data. But those extra data points are better suited to fill in the gaps—not to replace the solid foundation that official government reports provide.
“I don’t think 4 weeks without data is long enough to feel like you’re flying completely blind, because economies don’t shift that quickly,” says Norimoto. “But if this goes on further it could become a bit of a vacuum.”
What rate cuts may mean for consumers and investors
It’s important to understand that the Fed only controls very short-term interest rates. The Fed does not set interest rates on mortgages, CDs, or bonds, though its actions influence these rates.
The impact for consumers may be most immediately felt with lower interest payments on debt with rates tied to the prime rate, such as some credit cards, adjustable-rate mortgages, and home equity lines of credit. Savers and investors may notice the impact most directly on very short-term fixed income, like money-market funds and short-term Treasurys and CDs, which are likely to experience falling rates.
Beyond rates: An important shift in Fed policy
The central bank also announced it is close to stopping its years-long process of shrinking its balance sheet, also called “quantitative tightening” (QT).
During COVID, the Fed had engaged in “quantitative easing”—buying trillions of dollars of mortgages, Treasurys, and other securities, in an effort to keep the financial system running smoothly. In 2022 the Fed began gradually reducing its holdings of these securities, primarily by not replacing maturing bonds and mortgages.
QT mainly affects financial markets behind the scenes, by reducing bank reserves and drawing down liquidity in money-market securities. Similarly, ending QT may be mostly felt behind the scenes—but at the margin it could help to ease liquidity, which can indirectly help support stocks and other investments.