Fed Diagnoses "Slowing Employment, Slight Rise in Unemployment Rate"
Two Dissenting Votes: Myron Calls for Big Cut, Schmidt Advocates Holding Rates Steady
The United States Federal Reserve (Fed) has cut its benchmark interest rate by 0.25 percentage points, as widely expected by the market, marking its second consecutive rate cut. The Fed also announced that it will end quantitative tightening (QT), known as balance sheet reduction, starting in December.
On the 29th (local time), following the regular Federal Open Market Committee (FOMC) meeting, the Fed released a policy statement announcing its decision to lower the federal funds rate by 0.25 percentage points to a range of 3.75% to 4.0% per annum.
This move follows last month’s rate cut, the first of the year, making it two consecutive months of rate reductions. As a result, the interest rate gap between Korea and the United States has narrowed to 1.5 percentage points at the upper end.
The Fed also announced its decision to end quantitative tightening, which began in June 2022 following the COVID-19 pandemic, effective December 1. Quantitative tightening refers to measures in which the Fed absorbs market liquidity by selling bonds it holds or by not reinvesting maturing securities. This is the opposite of quantitative easing (QE), in which the monetary authority supplies liquidity by purchasing bonds.
The Fed cited a slowdown in the labor market as the reason for this rate cut.
In its statement, the Fed noted, "Available indicators suggest that economic activity has been expanding at a moderate pace," adding, "Job growth has slowed this year and the unemployment rate has risen slightly, but as of August, it remained at a low level. More recent indicators are consistent with these trends." Regarding inflation, the Fed assessed, "Inflation has increased since the beginning of the year and remains somewhat elevated."
This decision comes as the release of key economic indicators, such as employment and unemployment rates, has been delayed due to the U.S. federal government shutdown (temporary suspension of government operations). However, the market had already anticipated a high possibility of further rate cuts by the Fed, as signs of a slowdown in employment coincided with a lower-than-expected inflation rate. The Consumer Price Index (CPI) for September rose 3.0% year-on-year, up from 2.9% in August, but still below the market forecast of 3.1%.
Of the 12 FOMC members with voting rights, 10 supported the rate cut decision. The two dissenting votes came from Steve Myron, a Fed Governor known as one of President Donald Trump's "economic advisors" who has consistently called for aggressive rate cuts, and Jeffrey Schmidt, President of the Federal Reserve Bank of Kansas City. Myron, as in the previous month, advocated for a so-called "big cut" of 0.5 percentage points. In contrast, Schmidt argued for holding rates steady, representing an opposing view. This reflects deepening internal debate and differences within the Fed as the labor market slows but inflation remains above the Fed's 2% target, highlighting the tension between its dual mandates of price stability and full employment. Christopher Waller, a Fed Governor considered a candidate for the next Fed Chair, and Michelle Bowman, Fed Vice Chair, supported the majority decision for a 0.25 percentage point cut rather than a big cut.
Following the Fed's rate cut announcement, the New York stock market continued its upward trend. As of 2:18 p.m., the Dow Jones Industrial Average was up 0.28% from the previous session. The S&P 500 and Nasdaq indices were also up by 0.2% and 0.56%, respectively.
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