Cooling Labor Market Prompts Fed’s Decision to Cut its Key Rate

On Wednesday, October 29th the Federal Open Market Committee (FOMC) decided to cut the federal funds rate by ¼ percentage point (25 basis points) to a target range of 3.75% to 4.00% according to the Federal Reserve’s press release. Already challenged by the unclear picture of the direction of the U.S. economy due to ongoing mixed signals “with “bifurcated” consumers stressed at the low end of the income distribution but those at the upper end spending robustly, and economic growth buoyed by business investment even it that is not translating into strong job growth,” the lack of official data due to the ongoing government shutdown has led to further uncertainty of the true state on the nation’s economy. While the gradually cooling labor market prompted the rate cut decision, Fed Chairman Jerome Powell reportedly noted that there “were strongly differing views in the committee’s discussion about how to proceed in December.” Although a further rate reduction before the end of the year is not a foregone conclusion, Powell further stated that “a growing chorus now … feeling like maybe this is where we should at least wait a cycle” before cutting rates again. Acknowledging that inflation has “not risen as strongly as initially expected due to the White House’s new import taxes, concern remains of an expected rise through the remainder of 2025; but in response to the latest lowering of the Fed’s key rate, Powell reportedly said in his own view that the “modestly restrictive” rate is, which is 150 basis points, or 1.5% below its peak last year, is “still putting some downward pressure on inflation.”

The decision by the Fed to end the drawdown of “its still substantial balance sheet” was also announced and came in response to signs of money market liquidity beginning to tighten — a condition the Fed has pledged to avoid, and bank reserve levels dropping. The Fed’s holdings rose to $9 trillion by the middle of 2022 due to a “huge wash of liquidity the Fed added to the financial markets during the pandemic” in an effort to support the economy. Although quantitative tightening (QT) has been steadily reducing Fed holdings since then, decisions to stop will see the Fed moving forward with a “balance sheet that’s considerably larger than the $4.2 trillion level seen at the onset of the COVID-19 pandemic.” According to the news article by Reuters, beginning December 1 the Fed will “hold steady its stock of government bonds by rolling over maturing Treasuries instead of allowing up to $5 billion in Treasury securities to mature each month and not be replaced. However, the Fed will continue to “maintain its current plan to allow up to $35 billion in mortgage-backed securities (MBS) to expire each month – a target it has never achieved in more than three years of reductions but beginning December 1 will reinvest all proceeds from maturing MBS into Treasury bills.”

Source:    https://www.reuters.com/business/fed-in-fog-it-heads-toward-another-rate-cut-2025-10-29/

Source: https://www.reuters.com/business/finance/fed-end-balance-sheet-reduction-december-1-2025-10-29/