Fed's Rate Cut Sparks Dissent Amid Data Gaps and Inflation Concerns

The Federal Reserve on Wednesday reduced its benchmark interest rate by 25 basis points, bringing the target range to 3.75%-4.00%, as it sought to address slowing economic growth and persistent inflation above its 2% target, according to its FOMC statement. The move, widely anticipated by markets, according to a Bond Buyer report, followed a two-day Federal Open Market Committee (FOMC) meeting and marked the second rate cut of 2025. However, the decision was not unanimous, with two officials dissenting—Stephen Miran, a Trump appointee who favored a larger 50-basis-point cut, and Jeffrey Schmid of the Kansas City Fed, who preferred no change due to inflation concerns, as noted in the FOMC statement.

The Fed's action came amid a government shutdown that has disrupted the flow of critical economic data, forcing policymakers to rely on private-sector indicators and alternative metrics, according to a WCVB article. While inflation data released last week showed a slight moderation, per an Investing.com article, the central bank emphasized that "inflation remains somewhat elevated" and that risks to its dual mandate of maximum employment and price stability remain unbalanced in the FOMC statement. The decision to cut rates reflects growing concerns over a cooling labor market, with hiring gains slowing and unemployment edging upward to 4.3% in August, the WCVB article noted.

Markets reacted swiftly to the Fed's move, with Bitcoin surging past $116,000 as leveraged positions in crypto derivatives hit $37.6 billion—the highest level since the start of the year, according to an Unchained Crypto report. Traders priced in a 96.7% probability of another 25-basis-point cut in December, per a TradingView analysis, though Chair Jerome Powell tempered expectations, warning that "a December cut is not a foregone conclusion" due to data gaps and evolving risks in a Morning Brew piece. The S&P 500 and Nasdaq 100 also hit record highs, driven by a tech-led rally as investors speculated on AI-driven growth and potential easing cycles, according to a Sherwood market wrap.

The Fed's policy shift has reignited debates about its long-term inflation target. Critics argue that repeated rate cuts despite inflation hovering near 3% suggest a de facto acceptance of a higher target. "If the Fed's revealed preference aligns with 3% inflation, it risks undermining credibility," wrote Bloomberg Opinion, noting that private-sector inflation expectations have drifted above 2%. Kansas City Fed President Schmid, who dissented against the rate cut, warned that easing could erode confidence in the central bank's commitment to its 2% goal in a Reuters report.

Compounding the Fed's challenges, the government shutdown has delayed key economic reports, including the October jobs data and inflation figures, the WCVB article reported. With 750,000 federal workers furloughed, policymakers are navigating "foggy" conditions, relying on state-level unemployment claims and private-sector data to gauge the economy, the Morning Brew piece added. This uncertainty has raised questions about the sustainability of future rate cuts, with bond markets pricing in a gradual path toward 3.25%-3.50% by year-end, the Bond Buyer report showed.

The Fed also announced it will end its quantitative tightening (QT) program by December 1, halting the three-year effort to reduce its $6.6 trillion balance sheet, the Morning Brew piece reported. While the move aims to stabilize money markets, analysts caution that the lack of official data increases the risk of misjudging economic conditions, the WCVB article warned.

As markets brace for Powell's post-meeting remarks, attention turns to the December FOMC meeting, where the Fed's next steps could further test its resolve to balance growth and inflation. For now, the central bank remains steadfast in its commitment to "returning inflation to 2%," even as diverging views within its ranks and external pressures from the White House underscore the complexity of its mandate, the FOMC statement said.