Why the Fed cut interest rates
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Hello, everyone. I'm Kimberly Adams. Welcome back to Make Me Smart, where none of us is as smart as all of us. Today, we're talking about the Federal Reserve's decision this week to cut interest rates by a quarter of a percentage point. Now, this is the third cut this year, and it comes as the president continues to put pressure on the supposedly independent agency to move the economy the way he wants. And as some changes are coming down the pipeline for the Fed's membership. So here to unpack all of this with us is our resident Fed expert and my D.C. Bureau office buddy, Marketplace correspondent Nancy Marshall-Genzer. Hey, Nancy. Hello. So yesterday, the Federal Reserve cut interest rates by the quarter of a percentage point, like we said, but it was a pretty divided decision.
Why were the FOMC members, the Federal Open Market Committee, why were they so conflicted? Well, Stephen Myron, who is a Fed governor appointed by President Trump on leave from his position as head of the Council of Economic Advisors, he has been dissenting pretty consistently. He definitely wants lower interest rates, lower than the quarter percentage point the Fed cut yesterday.
Why did the Federal Reserve cut interest rates this week?
But there's also just a lot of uncertainty, Kimberly. At the last Fed meeting, Chair Powell described it as driving in the fog. And he said yesterday that he really could have made a case for either lowering more or staying the same, just because the economy is so uncertain. There's just no certain path right now. And there were a couple of other dissents as well, yeah? Yeah. Yes, there were. We had two other dissenters, Austin Goolsbee, who is the president of the Chicago Fed. He dissented. Also, Jeffrey Schmidt, the head of the Kansas City Fed, he dissented. But, Kimberly, they didn't want lower rates. They actually... wanted rates to stay the same. They're known as hawks, and they're worried about inflation and they're worried that if the Fed lowers rates too much, that will fuel the economy too much and inflation will get out of control.
There's also a little bit of uncertainty about government data. Of course, it's been delayed by the shutdown. But the Bureau of Labor Statistics always kind of issues a caveat with the jobs numbers. You know, every month it gives us the unemployment rate, but it also tells us how many jobs were created. And it always revises that. But it's hard to estimate because the BLS is trying to account for businesses that either were started in a particular month or or closed in a particular month, and it has to revise them. And it's making some revisions to the model, but things are still not exact. And Powell talked about that yesterday. It's very difficult to estimate job growth in real time. They don't count everybody.
They have a survey. And there's been something of a systematic overcount. And so we expected, and they correct it twice a year. So the last time they corrected it, we thought the correction would be 800,000 or 900,000. I won't get the numbers exactly right.
What factors led to dissent among FOMC members regarding the rate cut?
And that was exactly what happened. So we think that that has persisted. And so there's an overcount in the payroll job numbers, we think, continuing. And it will be corrected. I don't have the exact month in my head right now. And that's just, again, I think forecasters generally understand that. You know, it's interesting, Nancy, because this is kind of a separate issue of just like the systemic overcount from the fact that we were missing a lot of data from the government itself due to the shutdown. So how did the Fed kind of taking all this into consideration land on the quarter percentage point? You know, as I said, Chair Powell said you could have gone either way, but they do have some private data that they've been looking at as far as job creation.
And they also, you know, each Fed bank has very good contacts in their region. And they, of course, put together the Beige Book and talk about what their contacts are telling them about the economy. So Powell said he feels like they have a pretty good idea of how things are looking.
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