Hot on the heels of the Bank of Canada cutting its overnight rate by .25% on Wednesday, the US Federal Reserve (the Fed) followed suit with its own .25% cut.
It is the first cut by the Fed since December 2024, coming after US President Donald Trump exerted pressure on US Fed Chair Jerome Powell to cut the rate, or be cut from his job.
The cut moves the Fed rate in the range of 4% to 4.25% and indicates concerns about the state of the US labour market, which is slowing, and outweighing worries about inflation.
"The labour market is really cooling off," Powell said in a news conference Wednesday following the rate-cut announcement.
The pressure on Powell from Trump included attacks on Powell for not lowering rates sooner, and an effort to unseat a Biden-era Fed appointee over accusations of mortgage fraud, according to NBC News.
Up until Wednesday, Powell resisted the pressure and maintained the Fed’s dual mandate of keeping both unemployment and inflation low meant it needed to use caution to not overheat the economy, risking a return to rapidly rising prices.
“We’ve done very large rate hikes and very large rate cuts in the last five years, and you tend to do those at a time when you feel that policy is out of place and needs to move quickly to a new place,” said Powell at the news conference. “That’s not at all what I feel.”
There are 12 members on the Fed’s rate-setting committee, with 11 voting for the .25% cut. The dissenter, newly appointed governor Stephen Miran, voted for a .5% cut. Miran also is chair of the White House’s Council of Economic Advisers, though he is officially on leave from that role.
President Donald Trump's two other appointed governors, Michelle Bowman and Christopher Waller, both voted for the quarter-point cut.
In its Wednesday statement, the Fed said two more rate cuts are possible before the end of the year, although seven of the 12 committee members were more of the mind that rates should remain unchanged for the rest of the year. The committee will meet again in October and December.
NBC reported the US labour market is slowing dramatically, with the August job report showing only 22,000 jobs were added, well below the expectations of economists.
“That report also showed that the US lost jobs in June. So far this year, the economy has added 598,000 jobs, compared with 1.4 million for the first eight months of 2024,” reports NBC. “The unemployment rate also ticked higher last month to 4.3%, a level not seen since September 2017 outside of the COVID-19 pandemic.”
In the news conference, Powell called the labour market “unusual,” adding fewer firms are hiring, but that the available supply of workers is also declining due to Trump’s immigration crackdown.
The rate cut could lead businesses to increase hiring as it becomes less expensive to take out loans, and credit card rates fall for consumers.
In terms of US inflation, it has been slowly rising since April when Trump announced his sweeping reciprocal tariffs, going from 2.3% to 2.9% in August. The Fed’s inflation target is 2%.
“After weak July and August employment reports and a large negative preliminary benchmark revision, job growth now appears to be much lower and below the breakeven rate, the risks still tilt toward further negative revisions, the unemployment rate has risen slightly for two months in a row, and our broader measure of labour market slack has risen a bit more,” Goldman Sachs economists wrote in a client note.
A search of websites found a Fed rate cut almost always affects Canada, though the effects vary in strength depending on the situation.
The Fed’s cut was designed to stimulate the US economy, just as the Bank of Canada’s cut is aimed to stimulate the Canadian economy. The US is Canada’s largest trade partner and if the Fed's cut does its job, Canadian exporters benefit from stronger US demand for goods such as motor vehicles, oil, lumber and manufactured products.
Canadian stock markets in also tend to rally in tandem with US markets, since investors view them as linked economies.
The bottom line is a Fed rate cut generally eases financial conditions in Canada, boosts demand for Canadian exports through stronger US growth and can influence the Loonie.
