After this week's rate cut, the Fed seems to be confused on what's next

Given that there has been a blackout of large amounts of economic data during the federal government's shutdown (other than a report last week showing US inflation was up to 3% over the previous 12 months), the Federal Reserve's Open Markets Committee had its meeting this week under unusual circumstances. So what info did they go on, and what did they decide to do?

Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up but remained low through August; more recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment rose in recent months.

In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 3-3/4 to 4 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee decided to conclude the reduction of its aggregate securities holdings on December 1. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

So the Fed sees higher inflation and a slower job market. That seems like a pretty bad situation.

Fed Chair Jerome Powell met the press after the rate decision was made, and many took notice that Powell mentioned a third rate cut in December "was not a foregone conclusion." When asked about that, the Fed Chair said that an increasing number of FOMC members were saying it may again be time to lay back and see how things play out.

The data and reports that we have been able to see in recent weeks indicates the US economy is still growing, even as the government has shut down and prices keep rising. One day after the Fed meeting, Chairman Powell gave an interesting response on why he thinks that may be.

Fed Chair Jerome Powell acknowledged Wednesday that the soaring stock market is helping support consumer spending — and the overall economy — right now.

If the market goes down, Powell said, it could hurt consumer spending. But spending wouldn't take a large hit unless the market plunged.

"I think it's certainly a factor supporting consumption right now," Powell said in response to a question asked by Yahoo Finance about how much of consumer spending and the economy hinges on the stock market remaining strong…..

Powell and others have noted the US is in a "bifurcated economy": Lower-income individuals are pulling back on spending, while wealthy individuals benefiting from market run-ups continue to drive spending — perhaps keeping the economy afloat.

According to a September analysis by Moody's Analytics chief economist Mark Zandi, Americans in the bottom 80% of the income distribution — those making less than $175,000 a year — are barely keeping their spending on pace with inflation. Meanwhile, the top 20% of consumers are growing their spending.

So what's keeping our economy afloat is an AI bubble that has a lot of belief in future activity, but so far hasn't resulted in much of anything that has improved everyday people’s lives. That's not a healthy situation.

It also helps to explain why US consumer confidence continues to fall even as records are being set on Wall Street. Regular Americans aren’t seeing the boost to their wages or job prospects that they had a couple of years ago, but inflation continues to rise at a higher rate than we had this time last year – when we were told inflation was so awful that enough swing/low-info voters got Donald Trump back to the White House on the issue.

And if stocks keep rising, that would be all the more reason to stop the rate cuts, to avoid further borrowing and speculation in an already overvalued market. Which means that the only way we should be seeing rate cuts in December is because we've seen a pickup in layoffsm the real economy has gone toward recession, and/or the stock market has lost a sizable amount of their 2025 gains. Yet the coked-up traders on Wall Street don't seem to understand this, and think that the party's just going to continue.