Fed rate decision October 2025
The Federal Reserve approved its second consecutive interest rate cut on Wednesday; This was a widely anticipated move despite little recent visibility on the economy due to the government shutdown.
The central bank’s Federal Open Market Committee, by a 10-2 vote, lowered the benchmark overnight borrowing rate to a range of 3.75%-4%. In addition to the interest rate move, the Fed also announced that it will end its tapering of asset purchases on December 1, a process known as quantitative tightening.
Governor Stephen Miran again voted against the Fed, preferring to move faster with a half-point cut. Kansas City Fed President Jeffrey Schmid also joined Miran in dissenting, but preferred the Fed not cut at all for the opposite reason.
The rate also serves as a reference point for a variety of consumer products, such as auto loans, mortgages and credit cards. This reduction comes despite the Fed being blindsided on economic data lately.
The government has suspended all data collection and reporting, except for the consumer price index announced last week; This means key measures like non-farm employment, retail sales and a host of other macro data are unavailable.
In a statement released after the meeting, the committee acknowledged the uncertainty caused by a lack of data and characterized the way it categorized general economic conditions.
“Current indicators show that economic activity is expanding at a moderate pace. Employment gains have slowed this year and the unemployment rate has risen slowly but remained low through August; more recent indicators are consistent with these developments,” the statement said. “Inflation has risen since the beginning of the year and remains somewhat high.”
Each of these characterizations represented tweaks to the September statement. The most important change was the view on broad economic activity. In September, the FOMC said activity was moderating.
In the statement, policy makers’ concerns about the labor market were reiterated and it was stated that “downside risks to employment have increased in recent months.”
Even before the shutdown, evidence was beginning to emerge that the pace of hiring was holding steady while layoffs were brought under control. At the same time, inflation remained well above the Fed’s 2% annual target. The CPI report, released last week for its importance to Social Security cost-of-living adjustments, showed the annual rate was 3%, driven by higher energy costs as well as various items with a direct or indirect connection to President Donald Trump’s tariffs.
The Fed tries to strike a balance between full employment and stable prices. However, officials said they have recently seen that the risk posed by the employment situation is slightly higher. The Fed said that with the interest rate decision, the process of reducing the amount of bonds held by the central bank on its $6.6 trillion balance sheet will end.
The program, also known as QT, had saved about $2.3 trillion from the Fed’s Treasury and mortgage-backed securities portfolio. Instead of reinvesting maturing proceeds from securities, the Fed allows them to be removed from the balance sheet to a limited extent each month. But recent signs of some tightening in short-term lending markets have raised concerns that the downward trend has gone far enough.
An implementation note accompanying the decision stated that the Fed would transfer proceeds from maturing securities into shorter-term bonds, thereby shortening the duration of the broader portfolio. Previously, the Fed transferred the revenues to securities with the same maturities.
Markets had recently begun to predict that the Fed would end QT in October or at the end of the year. The Fed expanded its holdings during the Covid crisis, taking the balance sheet from $4 trillion to close to $9 trillion. Powell said the Fed found it necessary to shrink its holdings but did not foresee a return to pre-pandemic levels.
In fact, Evercore ISI analyst Krishna Guha said he could foresee a scenario in which the Fed resumes purchases “for organic growth purposes” as early as 2026 as market conditions change. The Fed rarely eases monetary policy during economic expansions and bull markets in stock markets. The major averages, while volatile, are hitting a series of record highs, fueled by gains in Big Tech stocks and a strong earnings season.
History has shown that if the Fed cuts under these conditions, the market continues to rise. However, easier policy also comes with the risk of higher inflation, a situation that could force the Fed into a series of aggressive interest rate cuts.
