In a move that signals a significant shift in its policy stance, the Federal Reserve delivered its second interest rate cut of 2025 on October 29th, reducing the benchmark rate by 25 basis points. The decision, however, was far from unanimous, revealing a deeply divided committee grappling with a complex economic landscape.
The most telling part of the announcement wasn’t just the rate cut itself, but the dramatic dissent from both sides of the debate. One member, Miran, argued for a more aggressive 50 bps cut, while another, Schmid, voted for no cut at all. This split highlights the Fed’s challenging tightrope walk: battling “somewhat elevated” inflation while responding to growing signs of economic softness.
Key Takeaways from the October 29th Decision:
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A Pre-Emptive Strike? The 25 bps cut suggests the Fed is opting for a pre-emptive strategy to cushion the economy. The official statement pointed to increased “downside risks to employment,” a clear sign that protecting the job market is now a primary concern, even as inflation remains above their comfort zone.
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The Balance Sheet Surprise: In a major development, the Fed announced it will stop shrinking its balance sheet on December 1st. This move, known as ending “Quantitative Tightening” (QT), is a powerful form of monetary easing. By halting the withdrawal of liquidity from the financial system, the Fed is ensuring that its rate cuts are not undermined by a tightening of financial conditions elsewhere.
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Acknowledging the Inflation Reality: The Fed’s admission that inflation has “moved up and remains somewhat elevated” is a stark departure from earlier optimism. It confirms that the path to the 2% target is proving bumpier than expected, yet the decision to cut anyway underscores that growth concerns are now taking precedence.
What This Means for the Future
The Fed’s dual action—cutting rates and ending QT—leaves no doubt: the “pivot” is in full swing. The central bank is signaling that it is more worried about an economic slowdown than a resurgence of inflation.
For markets and consumers, this implies:
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Continued Lower Borrowing Costs: Mortgages, car loans, and business credit are likely to become more affordable.
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Support for Risk Assets: The environment of lower rates and increased liquidity is traditionally positive for stocks and other investments.
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A Focus on Data: The deep division within the Fed means future decisions will be highly dependent on incoming economic data, particularly the next rounds of employment and inflation reports.
The Fed is no longer just tapping the brakes; it’s cautiously pressing the accelerator to navigate what it sees as rising risks ahead. The question is no longer if the Fed will continue to ease policy, but how quickly it will feel the need to do so.
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