Econified

Interest rates have been lowered by the Federal Reserve today following the final meeting of the year for the Federal Open Market Committee. The interest rate was lowered by 0.25%, which is the result the market predicted. This brings the Federal Funds Rate range to be between 3.5% to 3.75%. The Federal Reserve is tasked with a dual mandate to keep inflation and unemployment low. This was an interesting meeting because public data on economic health has not been available since September. The Bureau of Labor Statistics releases a monthly report on the previous month’s economic health, but the government shutdown stopped this economic reporting from taking place.

This means that the data available for the Federal Reserve to decide on a course of action was limited to September’s job and inflation numbers. Since the last meeting where interest rates were set was in October, there is not a lot of new data was available for new decisions to be made.

Decreasing interest rates signifies that the Federal Reserve believes that weaker employment is more important than inflation right now. Inflation is currently elevated, but unemployment has also slowly been growing. The Federal Reserve’s stated goal for inflation is 2% over the long-term, but that has not been the case in several years. In fact, the most recent reports show inflation to be growing, and it was at 3% in September.

The inflation can be attributed to President Trump’s tariffs, which typically raise prices in order to bring about economic growth. However, these tariffs have not stopped unemployment from rising. This signals that there may be more concerns with the labor market since unemployment is very detrimental to the economy. This is likely why the Federal Reserve lowered interest rates despite the risk of worsening the inflation problem we are currently facing.

There will still be 3 more meetings before the new chair of the Federal Reserve assumes the position. Jerome Powell does tend to favor policies to lower interest rates, but not at the cost of inflation. President Trump will likely nominate someone for the chair role that will be more inclined to decrease interest rates because that will make the economy appear health in the short run. In the long run, the growth may be offset by the increased inflation that the low interest rates caused. Only time will tell if there will be future rate cuts. The labor market and inflation numbers from November will be instrumental for the Federal Reserve to see the health of the economy. Inflation will not decrease down to 2% in the span of 2 months, so there will be a need to keep the rates steady or increase the rates. However, just like with this meeting, if the labor market is more concerning, this could cause the Federal Reserve to decrease the rates again. This is why I believe the future labor market reports are going be more important in determining future interest rate decisions.