The U.S. Federal Reserve voted Wednesday to cut interest rates by half a percentage point, notching down the federal-funds rate, on which other interest rates are based, from 5.25%-5.5% to 4.75%-5%. An overwhelming majority (11 of 12 Fed voters) supported the sizable cut, and a narrow majority of Fed officials signaled their openness to further quarter-point rate cuts at both their November and December meetings.
The sudden and significant rate cut, with more on the horizon, can only mean one thing: Federal Reserve officials see trouble brewing in the U.S. economy. The size of the cut “suggests the Fed is worried about the labor market,” said hedge fund economist Dean Maki. “It is an unusually large move in the context of the economic data we’ve been receiving.”
The Federal Reserve aims to set the interest rates to balance inflation against unemployment. Setting the interest rate too low can fuel inflation, while setting it too high can set off an economic downturn — or so the theory goes.
The Fed last lowered interest rates in stages from July 2019 to March 2024 — lowering them all the way in response to government-mandated economic shutdowns related to the COVID-19 pandemic. In 2022, the Fed raised interest rates aggressively in response to mounting inflation. The interest rate remained steady from August 2023 until the Fed’s meeting on Wednesday, which opted for a half-point reduction over a quarter-point reduction.
Thus, after a year of holding interest rates steady, the Fed sprang into action with a sizable shift, indicating that Fed officials have detected sizable shifts in the economy. On the one hand, the Fed calculated, “Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated,” while “Job gains have slowed.” In other words, Federal Reserve officials now believe poor job growth is a bigger economic threat than ongoing inflation.
This conclusion is clearly related to a development in August, since the last meeting of the Federal Reserve Board. In late August, the U.S. Bureau of Labor Statistics (BLS) issued an updated job growth estimate for the period from March 2023 to March 2024 that revised the total downward from 2.9 million to 2.1 million — the largest downward revision in at least 15 years.
After this massive revision, suddenly U.S. job numbers didn’t look so healthy. And, at their next meeting, the Federal Reserve chose to cut interest rates in response.
“Some minor revisions are not unusual, but they’ve had to make significant revisions,” observed Family Research Council President Tony Perkins. “This has real-life implications for the average American. … People are making — the Fed being one of them — financial decisions that affect the entire country based upon these numbers. This would suggest that this is not an administration that can be trusted.”
“This exposes the Biden economy as complete fake news. It’s been misinformation and disinformation to say the economy is strong,” responded Rep. Warren Davidson (R-Ohio). He also rejected the Biden-Harris administration’s claims about job creation at the beginning of his administration. “You reopened the economy after artificially keeping it closed. That’s not exactly a sign of future expansion. That’s just a recovery.”
As I wrote at the time, it seems unlikely that BLS statisticians were deliberately following orders to cook the books as a political boost to Democrats. That theory cannot explain why the BLS revised the job growth numbers before the election, instead of waiting until afterward.
It seems more likely that the Biden-Harris administration’s economic dishonesty took a different, subtler form. Namely, the administration consistently pursued economic policies that boosted not the economy but statistics that can only tell part of the story. Essentially, the administration performed the macroeconomic version of “teaching to the test” and achieved predictably hollow results.
“Households have been jumping up and down saying, ‘Pay attention to us. We can’t afford anything.’” But the Biden-Harris administration “looked at macroeconomists saying, ‘No, everything’s fine.’ Well, the average might be fine because some of the wealthiest people are flush with cash,” said Davidson. “But when you have people that are living paycheck to paycheck, that are on second- and third-shift jobs, waiting to clock in as the Wall Street’s shutting down for the day, their household income hasn’t gone up.”
Now that the scaffolding that was propping up U.S. jobs numbers has collapsed, the Fed has scrambled to respond to an economy that was much sicker than they thought. “It looks like the Fed is finally paying attention to the fundamentals in the economy. It says that they actually believe the corrected numbers and not the fake reports up front,” explained Davidson.
For the past 25 years, rate cuts by the Federal Reserve have been a reliable sign that a recession is just around the corner. In fact, the Fed began cutting rates before the last three recessions (in 2019, 2007, and 2000). One must go all the way back to the 1990s to find a time when the Federal Reserve cut interest rates without a recession.
The Fed is trying to quench inflation without catalyzing a recession. Federal Reserve Chair Jerome Powell explained that they are trying to “achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with this inflation” — a difficult and rarely achieved balancing act referred to as a “soft landing.”
But election-year rhetoric, continued deficit spending, and a dramatic influx of illegal immigrants act like powerful economic crosswinds, making that task more difficult. At the very least, the BLS revision in jobs numbers has removed a substantial error from the Fed’s calculations, recalibrating their sensors to the true conditions on the ground — even if those conditions aren’t looking great.
Joshua Arnold is a senior writer at The Washington Stand.