The Federal Reserve announced its second consecutive cut to its benchmark interest rate on Wednesday, reducing the federal funds rate by a quarter percentage point to a range of 3.75% to 4%.
While this will reduce borrowing costs for loans, credit cards and auto financing, lower interest rates can also fuel inflation. And inflation is still a concern: Prices are up 3% year over year as of September — well above the Fed’s target rate of 2%.
So why is the Fed still cutting rates?
The Fed is trying to protect jobs, which is part of its dual mandate to promote maximum employment and stable prices. And while inflation remains elevated, the labor market has been cooling in a way that could slow the economy.
“The Fed sees greater downside risk to the labor market than it sees the risk in inflation spiraling away,” Ryan Severino, chief economist and head of U.S. research at BGO, tells CNBC Make It.
