- [Narrator] The Federal Reserve has been climbing a mountain to combat stubborn inflation, so fast that it raised its benchmark interest rate 11 times in 16 months, then left it unchanged for more than a year, but now... - The committee decided to lower the target range for the Federal funds rate by a half percentage point. - Now is a make-or-break moment for the Fed. - [Narrator] While prices have cooled, an uptick in unemployment has reignited warnings of... - A recession. - A recession. - A recession. - And so the question now is: Can they stick the landing? - [Narrator] The Central Bank likes to keep inflation around 2%. That became a problem in the aftermath of the pandemic. Prices grew well above the 2% mark, eventually surpassing 7% in 2022. - [Nick] For the last two years, inflation was the big emergency.

that was occupying all of the Fed's attention. When the Fed was raising interest rates, they thought the economy was gonna have to slow down a lot more than it has. - I wish there were a completely painless way to restore price stability. There isn't, and this is the best we can do. - And what's happened is the economy's done pretty well and inflation's come down anyway. - [Narrator] By July, the Fed managed to bring inflation closer to 2.5%. And with prices easing, economists have turned their attention toward troubling signs in the labor market. The US economy added 142,000 jobs in August, a slight rebound from the summer's slump in hiring, but a notable decline from a year ago. - The cooling in labor market conditions is unmistakable. - It's harder to stop a rise in the unemployment rate once demand for workers has cooled. I mean, what you're seeing right now is businesses saying,

We just don't need workers the way we did a couple of years ago. - [Narrator] The Fed can try to avoid further erosion by cutting the Federal funds rate or the rate that commercial banks pay when they borrow from each other. Those cuts, in turn, can lead to reduced rates on loans, meaning lower borrowing costs for consumers in the form of mortgages, car loans, and credit cards. They can also create an incentive for businesses to invest in expansion and hiring. - The Fed can cut interest rates for two reasons. One would be you're actually trying to stimulate the economy. You could also cut interest rates, including in the current situation, just because they don't need to be as high as they've been. You don't need to slow down the economy as much as you had over the past year or two when inflation was much higher. - [Narrator] Back to the mountain that the Fed spent the last two years climbing,

starting from historically low interest rates near zero in early 2022, the Central Bank eventually hiked to rates between 5.25% and 5.5% by July 2023, and stayed there. Now they're coming down the mountain, but nobody really knows where base camp is gonna be. How far down are you going to go and how fast should you get there? Fed officials largely agreed on the path forward since June 2022, but in recent months, two routes down to base camp have emerged. Earlier this year, you heard a lot of people saying, Look, this economy's doing all right. The economy's adding jobs. The unemployment rate is at a historically low level. Why rush this? You have a Fed governor, Miki Bowman, the Kansas City Fed President, Jeff Schmid, saying... I still believe quite strongly that we really need to trend this inflation number towards two.

It has to be sustainable. The danger is that if the labor market starts to weaken a little bit more, it could weaken a lot more, and then you're having to cut more aggressively. [Narrator] The other camp argues more aggressive rate cuts could preempt a serious decline in employment. Now that you have the labor market slowing down, these people are saying, Let's get ahead of this. Let's not have a recession that isn't necessary to finish the job on inflation. There've been a number of Fed officials, the Fed governor, Adriana Kugler, with the Chicago Fed President, Austin Gouldsby, who have been more insistent in saying... We've got to keep our eye on the employment side of the mandate now. This is what the path down to 2% inflation looks like. The danger, of course, of going too fast is: Well, what if some new shock hits the economy

and inflation kicks back up? That would be very destabilizing to have interest rates go back up for the Fed to say, Whoops, we cut too much. We need to start climbing this mountain again. - [Narrator] The Fed announced at its September meeting that it would cut rates by 50 basis points, starting on a faster path down the mountain. - We thought about what to do, and we concluded that this was the right thing for the economy, for the people that we serve, and that's how we made our decision. - A 50-basis point interest rate cut signals more urgency here. They raised rates a lot and they raised rates in large increments on the way up, and so now that inflation seems like it's under control, but there are more risks of a bigger slowdown in the job market than they want, they're gonna take back some of those interest rate cuts more rapidly, too.

- But I think you can take this as a sign of our commitment not to get behind. - And so there'll be big questions now around: Well, do you expect to do this again in November, and in December, and early next year? How fast do you think you're gonna take back the interest rate increases that you made in '22 and '23? - [Narrator] As the Fed charts its way forward, a lot remains at stake for the economy and Powell in the months ahead. - And it would put Powell on the Mount Rushmore of Central Bankers if he can stick the landing. Is the economy just going through a soft patch, or is it falling into the recession that has been long predicted by many economists? The next six months could be pivotal to determining which of those we're seeing unfold here. (pensive music)

The Fed Rate Cut Is Here: Why the Next Few Months Are So Crucial | WSJ

The Wall Street Journal takes you inside carefully selected stories and events in a visually captivating way so you can dig deeper into the news and insights that matter to you. 

The Fed Rate Cut Is Here: Why the Next Few Months Are So Crucial | WSJ

The Fed Rate Cut Is Here: Why the Next Few Months Are So Crucial | WSJ

Scripts