The Fed Cuts Benchmark Interest Rate by 25 Basis Points, High Economic Risk

Source: The Fed | Editor: Syamsul Azhar

THE FED - JAKARTA. The Federal Open Market Committee (FOMC) has decided to lower the benchmark interest rate (federal funds rate) by 25 basis points to a range of 3.50%–3.75%. This decision was made amidst weakening labor market indicators and a resurgence of inflation in recent months.

In its official statement on Wednesday (12/10), The Fed assessed that the US economic activity is still growing at a moderate pace. However, job recruitment has been slowing throughout the year, while the unemployment rate has continued to rise until September.

Several recent indicators are said to be in line with this slowing labor market trend. On the other hand, inflation, which had subsided at the beginning of the year, has now risen again and is still at a level considered quite high.

The Fed reaffirmed its commitment to maintaining maximum employment and returning inflation to the 2% target. However, economic uncertainty is still high, with the risk of a weakening labor market increasing in recent months. These conditions have prompted the central bank to shift its monetary policy stance towards a more accommodative direction.

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Going forward, the FOMC stated it will continue to monitor incoming economic data before determining the next steps. The next interest rate adjustment will take into account inflation developments, labor market conditions, as well as global and financial economic dynamics. The Committee also affirmed its readiness to change policy if risks emerge that could hinder the achievement of price stability and employment objectives.

In addition, The Fed concluded that banking reserves have fallen to a level that is “sufficiently adequate,” so it will begin purchasing short-term US government debt if necessary to maintain liquidity adequacy.

The interest rate decision was not unanimous. Nine members, including Chairman Jerome Powell and Vice Chairman John C. Williams, supported the 25 basis point cut. However, three members disagreed: Stephen I. Miran pushed for a more aggressive cut of 50 basis points, while Austan D. Goolsbee and Jeffrey R. Schmid preferred no change in interest rates at this meeting.