The Federal Reserve cut interest rates by 25 basis points and will end its balance sheet reduction on December 1st. Powell stated that a December rate cut is "far from a certainty."
2025-10-30 03:26:30
On Wednesday (October 29), the Federal Reserve, as expected by the market, lowered the target range for the federal funds rate by 25 basis points to 3.75%-4.00% at its October meeting, marking the second rate cut this year. It also announced that quantitative easing (QT) will end on December 1. At the press conference, Fed Chairman Powell noted that economic data had not changed much since the September meeting, but the government shutdown had increased uncertainty due to data gaps, and there was "strong disagreement" within the committee regarding the policy path in December. This statement triggered a rapid market correction.
Policy Decision: A 25 basis point interest rate cut was approved by a 10-2 vote; QT will end on December 1st.
The Federal Open Market Committee (FOMC) of the Federal Reserve passed a resolution to cut interest rates by a vote of 10 to 2. Governor Stephen Milan advocated a 50-basis-point cut, while Kansas City Fed President Jeffrey Schmid advocated keeping rates unchanged. This marks the first time since September 2019 that there has been a two-way disagreement. The statement said that economic activity is expanding at a “moderate pace,” job growth is slowing, the unemployment rate has risen slightly but remains low, downside risks to employment have increased in recent months, and inflation has risen since the beginning of the year and remains at a relatively high level. Regarding the balance sheet, the Fed will stop shrinking its balance sheet on December 1st. The principal of maturing Treasury securities will be fully rolled over, and principal payments on mortgage-backed securities (MBS) will be reinvested in short-term Treasury securities to shorten the portfolio duration and bring it closer to the structure of outstanding Treasury securities.
Economic assessment: Pre-closure data was solid, labor demand slowed, and inflation was slightly above target.
Powell stated that pre-shutdown data suggested the economy was likely on a more robust trajectory, and while the shutdown would temporarily drag down economic activity, this should reverse after it ended. Labor demand has "significantly slowed," but layoffs and hiring remain low, job vacancies and hiring difficulty continue to decline, and the labor market is cooling "very slowly." Regarding inflation, PCE and core PCE are expected to rise by 2.8%, with continued slowing inflation in the services sector and declining inflation in housing services. Excluding the impact of tariffs, inflation is only 0.5%-0.6% above the 2% target. Tariffs may temporarily push up prices for some goods by 0.2-0.4 percentage points, but the base case scenario is a "short-term impact." Long-term inflation expectations are mostly consistent with the 2% target.
Risk Balancing and Future Path: Two-Way Risks Coexist, Significant Divergence in Committee Views
Powell emphasized that inflation faces upside risks and employment faces downside risks, a situation that is "serious" and requires a "balanced approach." The risk balance has shifted, and the Fed is "well-positioned" to respond promptly to developments, but faces risks on both sides. Committee members are "strongly divided" on December action, with some favoring a pause in rate cuts and others supporting continuation; differing forecasts and risk tolerance have led to this disagreement. Powell reiterated that today's rate cut was a "risk management" measure, and a December rate cut is "far from a done deal." Policy is not on a predetermined track, and missing data could be a reason for cautious action, like "driving slowly in the fog." Policy is currently "moderately tight," close to the neutral rate of 150 basis points from a year ago, which helps support demand and protect the labor market from further significant weakness. Powell stated that he sees no signs of a tightening labor market or changing inflation expectations and will not assume that tariff inflation is merely a one-off event.
Market reaction: US stocks turned lower, the US dollar index strengthened, and the probability of a December rate cut dropped to 71%.
U.S. stocks briefly rose after the Federal Reserve's statement, but turned lower during Powell's press conference. The Dow Jones Industrial Average fell 0.1% after rising 0.3% before Powell's speech, the S&P 500 fell 0.5% after rising 0.2%, and the Nasdaq Composite's gains narrowed to 0.2%.
Stocks gave back earlier gains as Powell said a December rate cut was "far from a done deal" and policy was "not on the expected track."
The yield on the two-year U.S. Treasury note surged 9 basis points to 3.569%, while the 10-year yield rose 6.2 basis points to 4.041%, flattening the 2-year/10-year yield curve and widening the spread to 46.9 basis points. The dollar index rose 0.46% to 99.13, the dollar gained 0.53% against the yen to 152.9, fell 0.37% against the euro to 1.1608, and declined 0.69% against the pound to 1.3179. The dollar was the strongest performer against the Swiss franc (+0.48%). Traders reduced their bets on a December rate cut, lowering the probability from 90% to 71%.
Spot gold gains narrowed to 0.3% ($3,964.18 per ounce), while Brent crude rose 0.81% to $64.92 per barrel.
Expert opinion: Divergence highlights uncertainty; the market needs to focus on data recovery.
TD Securities analysts said that despite the increased uncertainty due to missing data, the Fed’s guidance remains dovish, with Powell emphasizing signs of weakness in the labor market while warning of persistent risks to inflation.
Nick Timuraos, a Fed mouthpiece, commented that Powell's press conference showed that the FOMC as a whole does not agree with the market's high pricing of a December rate cut, aiming to regain policy flexibility and avoid being forced to take specific actions; the lack of data means "a very high degree of uncertainty, which could be a reason for caution."
The internal divisions within the Federal Reserve reflect a significant divergence in assessments of the economic outlook. This bidirectional disagreement is the first of its kind since the financial crisis, and investors must speculate on the basis for future interest rates. Analysts at SocieteGenerale point out that while US GDP growth exceeds potential and inflation continues to rise, a weak labor market and high uncertainty may prompt an "insurance" rate cut, leading to potentially unanimous decision-making.
Conclusion
The Fed's latest action balances the dual mandates of employment and inflation, but Powell's remarks successfully reversed dovish expectations, leading to more cautious market pricing. Data recovery after the shutdown will be crucial, and the committee's disagreements highlight the priority of policy flexibility.
Policy Decision: A 25 basis point interest rate cut was approved by a 10-2 vote; QT will end on December 1st.
The Federal Open Market Committee (FOMC) of the Federal Reserve passed a resolution to cut interest rates by a vote of 10 to 2. Governor Stephen Milan advocated a 50-basis-point cut, while Kansas City Fed President Jeffrey Schmid advocated keeping rates unchanged. This marks the first time since September 2019 that there has been a two-way disagreement. The statement said that economic activity is expanding at a “moderate pace,” job growth is slowing, the unemployment rate has risen slightly but remains low, downside risks to employment have increased in recent months, and inflation has risen since the beginning of the year and remains at a relatively high level. Regarding the balance sheet, the Fed will stop shrinking its balance sheet on December 1st. The principal of maturing Treasury securities will be fully rolled over, and principal payments on mortgage-backed securities (MBS) will be reinvested in short-term Treasury securities to shorten the portfolio duration and bring it closer to the structure of outstanding Treasury securities.
Economic assessment: Pre-closure data was solid, labor demand slowed, and inflation was slightly above target.
Powell stated that pre-shutdown data suggested the economy was likely on a more robust trajectory, and while the shutdown would temporarily drag down economic activity, this should reverse after it ended. Labor demand has "significantly slowed," but layoffs and hiring remain low, job vacancies and hiring difficulty continue to decline, and the labor market is cooling "very slowly." Regarding inflation, PCE and core PCE are expected to rise by 2.8%, with continued slowing inflation in the services sector and declining inflation in housing services. Excluding the impact of tariffs, inflation is only 0.5%-0.6% above the 2% target. Tariffs may temporarily push up prices for some goods by 0.2-0.4 percentage points, but the base case scenario is a "short-term impact." Long-term inflation expectations are mostly consistent with the 2% target.
Risk Balancing and Future Path: Two-Way Risks Coexist, Significant Divergence in Committee Views
Powell emphasized that inflation faces upside risks and employment faces downside risks, a situation that is "serious" and requires a "balanced approach." The risk balance has shifted, and the Fed is "well-positioned" to respond promptly to developments, but faces risks on both sides. Committee members are "strongly divided" on December action, with some favoring a pause in rate cuts and others supporting continuation; differing forecasts and risk tolerance have led to this disagreement. Powell reiterated that today's rate cut was a "risk management" measure, and a December rate cut is "far from a done deal." Policy is not on a predetermined track, and missing data could be a reason for cautious action, like "driving slowly in the fog." Policy is currently "moderately tight," close to the neutral rate of 150 basis points from a year ago, which helps support demand and protect the labor market from further significant weakness. Powell stated that he sees no signs of a tightening labor market or changing inflation expectations and will not assume that tariff inflation is merely a one-off event.
Market reaction: US stocks turned lower, the US dollar index strengthened, and the probability of a December rate cut dropped to 71%.
U.S. stocks briefly rose after the Federal Reserve's statement, but turned lower during Powell's press conference. The Dow Jones Industrial Average fell 0.1% after rising 0.3% before Powell's speech, the S&P 500 fell 0.5% after rising 0.2%, and the Nasdaq Composite's gains narrowed to 0.2%.
Stocks gave back earlier gains as Powell said a December rate cut was "far from a done deal" and policy was "not on the expected track."
The yield on the two-year U.S. Treasury note surged 9 basis points to 3.569%, while the 10-year yield rose 6.2 basis points to 4.041%, flattening the 2-year/10-year yield curve and widening the spread to 46.9 basis points. The dollar index rose 0.46% to 99.13, the dollar gained 0.53% against the yen to 152.9, fell 0.37% against the euro to 1.1608, and declined 0.69% against the pound to 1.3179. The dollar was the strongest performer against the Swiss franc (+0.48%). Traders reduced their bets on a December rate cut, lowering the probability from 90% to 71%.
Spot gold gains narrowed to 0.3% ($3,964.18 per ounce), while Brent crude rose 0.81% to $64.92 per barrel.
Expert opinion: Divergence highlights uncertainty; the market needs to focus on data recovery.
TD Securities analysts said that despite the increased uncertainty due to missing data, the Fed’s guidance remains dovish, with Powell emphasizing signs of weakness in the labor market while warning of persistent risks to inflation.
Nick Timuraos, a Fed mouthpiece, commented that Powell's press conference showed that the FOMC as a whole does not agree with the market's high pricing of a December rate cut, aiming to regain policy flexibility and avoid being forced to take specific actions; the lack of data means "a very high degree of uncertainty, which could be a reason for caution."
The internal divisions within the Federal Reserve reflect a significant divergence in assessments of the economic outlook. This bidirectional disagreement is the first of its kind since the financial crisis, and investors must speculate on the basis for future interest rates. Analysts at SocieteGenerale point out that while US GDP growth exceeds potential and inflation continues to rise, a weak labor market and high uncertainty may prompt an "insurance" rate cut, leading to potentially unanimous decision-making.
Conclusion
The Fed's latest action balances the dual mandates of employment and inflation, but Powell's remarks successfully reversed dovish expectations, leading to more cautious market pricing. Data recovery after the shutdown will be crucial, and the committee's disagreements highlight the priority of policy flexibility.
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