Policymakers face slowing job growth and mixed inflation data
The U.S. Federal Reserve is widely expected to reduce interest rates by 25 basis points this week, a move that would bring the benchmark rate into the 3.75% to 4.00% range. It would mark the second cut of the year as officials work to prevent further deterioration in the labor market. Despite data limitations caused by the ongoing government shutdown, rising jobless claims point to softening demand.
Fed officials have emphasized the need to remain responsive. The most recent policy statement made reference to “additional adjustments,” language interpreted by economists as a signal of future easing. Vice Chair for Supervision Michelle Bowman highlighted this wording as a clue that more cuts may follow. However, the Fed is unlikely to hint at a December move too clearly, given the uncertainty ahead.
Inflation cools, giving Fed more flexibility
Recent inflation reports have offered some relief. The consumer price index rose just 3% in the 12 months through September, easing concerns over tariff-related inflation. This gives policymakers room to cut without fear of fueling runaway prices. Still, views remain divided within the Fed itself.
Some officials argue that inflation risks remain too high to justify aggressive easing. Others believe further action is necessary to stabilize the job market. New Fed Governor Stephen Miran may again dissent, favoring a deeper 50-basis-point cut as he did in September. Miran is set to leave the Fed in January and return to his post as a White House advisor.
External pressures shape Fed’s next moves
The Trump administration continues to advocate for lower rates, applying pressure on Fed Chair Jerome Powell to take more decisive action. At the same time, Powell is managing internal disagreements and external volatility, including the unresolved U.S. government shutdown and ongoing global trade tensions.
These factors complicate forward guidance. Powell is expected to avoid pre-committing to further rate moves during his press conference, leaving the door open for adjustments depending on future data. If the shutdown ends soon, the Fed could access up to three months of employment data before its December meeting, possibly reshaping its trajectory.
Balance sheet and communication strategy in focus
Beyond the headline rate decision, analysts expect the Fed to discuss ending its balance sheet reduction, also known as quantitative tightening, possibly as early as this month. This would mark a major shift in monetary policy strategy and could support broader liquidity conditions.
Additionally, Fed officials are reportedly engaged in active discussions around revamping how they communicate rate path guidance. With markets already pricing in further cuts in December and January, clarity from the central bank will be key to managing investor expectations going forward.
