Federal Reserve cuts key rate for the second time amid hiring slowdown, rising prices and shutdown

The Federal Reserve on Wednesday cut its benchmark interest rate by a quarter-point for the second time this year, a step that could bring some financial relief to consumers and businesses but also runs some risk as inflation has been creeping up. The central bank said in a statement while making the rate-cut announcement that though the economic activity has been expanding, jobs growth had slowed and inflation had gone up. The rate cut will reduce the cost of borrowing in the economy and will have immediate effects on auto loans and credit cards and even though mortgage rates are not directly tied to the benchmark rate, they often move in parallel.

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Fed Chair Jerome Powell cautioned in a press conference that the government shutdown, which started Oct. 1, would weigh on economic activity as it drags on but added that those effects would reverse once it ends.

Deadlines for funding food assistance and salaries for federal workers, including air-traffic controllers and TSA agents, are set to hit this week, while Congress remains in a stalemate.

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The rate cut comes as the US economy is grappling with a slowing labour market and stubborn price growth. Several major companies have announced thousands of job cuts, while many government workers remain furloughed due to shutdown. As per federal data, price growth in September was at its highest point since January.

The Fed’s next rate decision is scheduled for Dec. 10. Powell said that there were “strongly differing views” about what the Fed should do at its next meeting.

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“Policy is not on a preset course,” Powell said.

Usually, when the labour market slows down, lower rates spur economic activity, and during rising inflation, the Fed hikes rates to curb rising prices. The Fed faces a dilemma currently when data simultaneously shows a weakening employment and price rise.

Lower interest rates sometimes worsen inflation by increasing overall economic activity.

Jobs data suggests the US is experiencing one of the weakest labour markets of the 21st century. Stocks were moderately higher after the announcement Wednesday.

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