In line with market expectations, the Fed’s FOMC has announced this evening that it has cut US interest rates. This latest rate cut underscores the Fed’s focus on labour market risks amid data disruptions and inflation uncertainty – especially given the potential impact of Trump’s tariffs.
The Federal Reserve has cut interest rates for a second consecutive meeting, lowering the target range to 3.75%–4.00% amid growing signs of labour market weakness and an increasingly uncertain policy backdrop. It’s also announced that it will stop its quantitative tightening (QT) from December. The move reinforces the Fed’s gradual shift towards monetary easing, even as inflation remains elevated and official data flows are disrupted by the ongoing US government shutdown. The Fed says that it remains committed to its 2% inflation target however. With markets riding high again today, and some key US companies set to report latest earnings data imminently, there’s a lot at stake. Perhaps the main point for discussion about this ;atest interest rate decision will be the widely dissenting voices within the FOMC. Some want cuts, some want increases, some want no change.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Susan M. Collins; Lisa D. Cook; Austan D. Goolsbee; Philip N. Jefferson; Alberto G. Musalem; and Christopher J. Waller. Voting against this action were Stephen I. Miran, who preferred to lower the target range for the federal funds rate by 1/2 percentage point at this meeting, and Jeffrey R. Schmid, who preferred no change to the target range for the federal funds rate at this meeting.
Add in mounting political pressure from President Trump and speculation over Jerome Powell’s successor, and the uncertainty dial has just been turned up another notch.
For investors, the decision highlights the fine balance the Fed must strike between supporting growth and avoiding a resurgence in inflation. With market participants now anticipating at least one further cut before year-end, attention turns to the December meeting – and to how far policymakers are willing to go in recalibrating monetary policy under mounting political and economic pressure.
Commenting, John Wyn-Evans, Head of Market Analysis at Rathbones, says: “The futures market-derived probability of a quarter-point cut in the Fed Funds rate at today’s FOMC meeting was 98% with a minute to go, and the Fed duly delivered as expected.
“Of greater import were comments on the economy and an announcement on the management of the balance sheet. The committee maintained its cautious view on the labour market, citing the gentle rise in unemployment and reduction in vacancies. Even so, there is no cause for alarm, with the overall economy still expanding at a moderate pace. No real surprises there.
“There was welcome news on balance sheet reduction. Having earlier this year reduced the pace of the reversal of past Quantitative Easing, it announced a complete halt on reducing its holdings of Treasury bonds from 1 December. It will continue to run down its book of mortgage-backed bonds, with the proceeds being invested back into Treasury Bills. This will come as some relief to market participants who had recently noted a gradual tightening of conditions in the overnight repurchase markets (that is the market for day-to-day bank liquidity).
“The restless market’s focus now shifts to December’s meeting. Given the dissent of Kansas City Fed President Schmid, expectations for another 25 basis point cut have eased slightly, but remain at 92%. A lot will depend upon the data in the interim, although that remains in short supply owing to the government shutdown. If there is no resolution by then, the Fed might be reluctant to act while “flying blind”.
“Market reaction was muted given the lack of meaningful surprises. There were rises of 2 and 3 basis points respectively for 2 and 10-year Treasury yields, and the dollar was marginally firmer, again reacting to Schmid’s vote not to cut, it would appear. Equity markets barely blinked and remain focused on tonight’s quarterly earnings releases from Alphabet, Meta and Microsoft. The AI-related trade remains the equity market’s biggest driver.
“Today’s news comes against the background of the Trump administration considering its shortlist of candidates to replace Chairman Powell when his tenure ends next May. The identity of the eventual appointee will probably be more important than anything that has been released today.
“Moving on to the press conference, initial comments from Chairman Powell have been taken poorly. He stated that a cut in December rate cut was ‘not a foregone conclusion’, knocking a quick half percent off equities and sending bond yields higher. That could well be the programmed reaction of algorithmically controlled funds to the threat of higher rates than expected. In reality, this is more likely to be the Chairman asserting his independence from White House interference or influence. The December decision will be made on merit according to the prevailing circumstances. At 6.40pm the probability of a December rate cut had dropped to 75%. These are fact-moving markets for traders, but have limited impact on long-term investment outcomes.”
Sharing his thoughts on what this Fed interest rate decision means, Stuart Clark, portfolio manager at Quilter said: “Despite the government shutdown cutting off vital data to the Federal Reserve, it has proceeded to cut interest rates by a quarter of a percentage point. This takes the target funds to under 4% for the first time in three years and the first back-to-back rate cut in nearly a year. It would appear as if the Fed is ready to get back on the rate cutting path, despite it being fraught with risks.
“The Fed is facing a number of idiosyncratic risks that other developed markets are not experiencing. The government shutdown continues and shows no sign of being resolved. We eventually got the inflation print for September but that looks as if it will be last official statistic for some time. Corporate earnings appear fine, and stock markets are at all-time highs, but employment numbers appear to be faltering. As emphasis is therefore put on private surveys, the Fed is flying somewhat blind as it scrambles to find out what is really happening in the US economy. In the meantime, Donald Trump continues to pile on the pressure to cut interest rates and speculation over who will take over from Jerome Powell next year is ramping up, with Secretary of the Treasury Scott Bessent being the latest name floated by Donald Trump.
“Depending on what the Fed can see that we can’t, there may be more rate cuts to come this year. It is clear that on balance Fed officials now see the current rate as too high for the economy, but it will be wary not to give inflation cause to spike again – especially as tariff related inflation may still show up over time. This tug of war will be evident by the dissenting votes with Stephen Mirran wanting a bigger cut and Jeffrey Schmid preferring to take a wait and see approach. The bigger question entering this decision was what the Fed would do with its quantitative tightening programme. Today’s announcement confirms the central bank will halt its scale of tightening from December, especially given we have seen recent signs of shrinking reserves in the system and as a result of other sources of uncertainty in the market. Reducing/halting this activity might just help calm some nerves on liquidity compared to if it waited another month to do so.
“The Fed is entering a very uncertain time in its rate setting and the risk of policy mis-step is clear. There is a pressure and expectation to bring rates down further from here, but it is likely the Fed won’t want to act too aggressively in fear of making a mistake.”
Commenting on today’s FOMC decision, Max Stainton, senior global macro strategist at Fidelity International, said: “The US Federal Reserve cut rates by 25 basis points (bps) as expected, taking the Fed funds target range down to 3.75-4.0 per cent. The accompanying statement reiterated downside labour market concerns stating, “risks to employment rose in recent months”, whilst retaining language on inflation, defining it as only “somewhat elevated”. This dovish reaction function was underlined by an earlier than anticipated ending of quantitative tightening (QT), with QT now signalled to end on the 1st December. Whilst most analysts expected this to be announced at the December FOMC meeting, recent stresses in funding markets have clearly made the Committee nervous about additional interest rate volatility, created by slight reserve scarcity. Taken altogether, this continues to demonstrate the extent to which this Fed has pivoted its focus towards managing the labour market.
“In the press conference, however, Chair Jerome Powell pulled back some of this dovish signalling, stating a rate cut in December is “far from” a forgone conclusion, which jolted markets out of complacency about a fully priced further cut in rates. Powell also pointed to the two dissents to today’s decision, in both directions, as further indication that they are not “on a preset course“. He reiterated this hawkishness by suggesting the data uncertainty from the government shutdown may warrant caution about a December cut.
“Looking ahead, despite Chair Powell’s insistence that a lack of data may manifest as caution around another rate cut, we expect this lack of data to manifest dovishly. The reduced data flow both masks the effects of previous DOGE layoffs and will start to produce its own negative growth effects as its length extends. As a result, we expect one additional cut by the end of the year in light of these dynamics and the revealed preference for being more dovish by halting QT earlier than most expected.”
Nicolas Sopel, Head of Macro Research and Chief Strategist at Quintet Private Bank (parent of Brown Shipley) said: “As widely expected, the US Federal Reserve (Fed) lowered interest rates to 3.75–4%, down from 4–4.25%. The decision was driven by inflation missing expectations in September, most likely caused by the ongoing government shutdown, which will likely further delay the release of upcoming economic data. Even so, it seems that the Fed wanted to follow through on its September projection, with a protracted government shutdown amplifying downside risks to activity. We expect the Fed to cut interest rates again in December to 3.5-3.75%.
“But the focus of the market was on the quantitative tightening (QT), which the Fed has decided to end from 1 December. In practice this now means that the Fed’s balance sheet will remain stable as the Fed offsets some assets it lets go off the balance sheet by buying Treasury securities.
“While the end of QT should somewhat ease concerns about rising government bond yields given a widening fiscal deficit in the US, we remain underweight in US Treasuries. Indeed, we think the Treasury market currently fully reflects expectations that the Fed will stop cutting interest rates at 3%, suggesting the downside in Treasury yields (and upside in Treasury prices) is limited.“
George Lagarias, Chief Economist, Forvis Mazars commented: “Markets overplayed their bets on just how much weak employment and a pressing White House would affect the central bank’s stance on inflation. It is only natural that the Fed’s chair would pour cold water on expectations for a series of rate cuts going forward. “Instead of being disappointed by a modest, as opposed to an aggressive, rate loosening policy, investors should celebrate the Fed’s affirmation of its independence, with one member even voting against the rate cut altogether. An independent central bank is more likely to have a grip on inflation, and would have more credibility if it needed to intervene in case the AI-driven equity market retrenches significantly,”
Richard Flynn, Managing Director at Charles Schwab UK is expecting more next month as he comments: “The Federal Reserve has continued its cautious path toward monetary easing, cutting another 25 basis points (bps) from the federal funds rate to a target range of 3.75% – 4.00%. This move follows September’s 25 bps reduction, the first since December 2024, and underscores the Fed’s growing concern over labor market fragility. Despite inflation remaining above the 2% target, partly due to tariff-related pressures, the decision reflects a clear prioritization of mitigating downside employment risks over inflationary concerns.
“This is unlikely to be the final cut of the year. We see a strong probability of another 25-basis-point reduction at the Fed’s next meeting on December 10, which would bring the range to 3.50% – 3.75%.
“Importantly, this should be viewed as a strategic recalibration rather than a wholesale policy reversal. The Fed remains firmly data-driven, even as the ongoing government shutdown temporarily disrupts key economic releases.
“For investors, the current environment provides near-term support for risk assets, but volatility is likely to persist given the many variables at play – labor market dynamics, inflation trends, and policy uncertainty.”
