NEW YORK (Reuters) -A divided U.S. Federal Reserve cut interest rates by a quarter of a percentage point on Wednesday and announced it will restart limited purchases of Treasury securities after money markets showed signs that liquidity was becoming scarce, a condition the U.S. central bank has pledged to avoid.
The 10-2 decision to lower the policy rate to a range of 3.75%-4.00% was expected by investors as a way for the Fed to temper any further decline in a job market policymakers worry may be losing steam.
Federal Reserve Chairman Jerome Powell said on Wednesday that U.S. central bank officials are struggling to reach a consensus about what lies ahead for monetary policy and that financial markets should not assume another interest-rate cut will happen at the end of the year.
MARKET REACTION:
STOCKS: The S&P 500 gave up early gains to trade down 0.1% in choppy trading.
BONDS: The yield on benchmark U.S. 10-year notes inched higher and was up 7.5 basis points to 4.0564%. The 2-year note yield was 8 basis points higher to 3.5755%.
FOREX: The dollar index extended gains and was last up 0.6% to 99.241, with the euro down 0.5% at $1.1594.
COMMENTS:
UTO SHINOHARA, SENIOR INVESTMENT STRATEGIST, MESIROW CURRENCY MANAGEMENT, CHICAGO:
“While the Fed delivered a widely expected rate cut, Schmid’s hawkish dissent and Powell’s cautious remarks suggested that another move in December is far from certain, lifting the dollar and weighing on risk assets.”
“Although softening labor conditions drove today’s decision, the lack of employment data due to the government shutdown and inflation edging back to 3% add uncertainty to the outlook, reinforcing Powell’s message that a December cut is anything but assured.”
KEITH LERNER, CHIEF INVESTMENT OFFICER, TRUIST ADVISORY SERVICES, ATLANTA, GA:
“Stocks initially went down as Powell pushed back on the market fully pricing in a rate cut in December but then bounced as he discussed his view that tariffs were more likely a one-time hit to inflation. He is trying to maintain optionality and flexibility.”
MICHAEL ROSEN, CHIEF INVESTMENT OFFICER, ANGELES INVESTMENTS, SANTA MONICA, CA:
“The rate cut was expected, Powell’s remarks took some shine off the market expecting another cut in December.”
“Powell is reflecting the tension within the Fed around additional easing at a time when inflation remains elevated and above the Fed’s own target.”
“Investors should expect that inflation will likely run higher for longer, which will limit the degree of additional monetary easing. Equities are down on these remarks as investors had been expecting more rate cuts would provide a boost, but this is a temporary reaction. It is earnings that ultimately drive equities, and those earnings have been strong, and we remain fully invested in our portfolios.”
TONY WELCH, CHIEF INVESTMENT OFFICER, SIGNATUREFD, ATLANTA:
“Working with the data that they do have… that continued to show a softening in the labor market. Now it is not a crisis in the labor market but there is a softening in the labor market, and the other piece was consumer confidence fell again, so when you start to look at those things it does make sense to turn your attention more to supporting the labor market than fighting inflation right now.”
“We do think the risk to inflation in 2026 is higher and I do believe that December could end up being the last cut in this cycle. The market is expecting three cuts next year, and the market may be sorely disappointed on that. And not for bad reasons, it is just there is stimulus next year, a lot larger tax refunds are coming… and that will prove stimulative and that should put some upside pressure on inflation. So it might be really challenging for the Fed to get back under 3% and you could even see inflation drifting up close to 4% next year and this time next year we might be talking about the reduction of a hiking cycle.”
“My suspicion was he was going to walk back 2026 action. Usually the market has been pretty good at pricing rate cuts and stuff, the Fed has been a way better guidance of their policy than the market itself. There have been a few disappointments now for the market and next year could be another one of those.”
“I think December is going to happen because we are on a pretty extended government shutdown, it is probably going to be the longest government shutdown we have had and there are actual hits to growth from that. So I do think you are going to have soft-ish growth for this last quarter of the year that is probably going to manifest in even less hiring, less job openings and stuff. So I think the Fed is going to have a green light to go in December.”
“(Powell) has basically done that in basically every press conference in which they have had a rate move, he has walked back market expectations for the next meeting.”
DIMITRI SILVA, MANAGING DIRECTOR AND HEAD OF GLOBAL RATES AND CURRENCY, REAMS ASSET MANAGEMENT, NEW YORK:
“The FOMC implemented a 25 basis point cut, as expected by markets. We saw one dissent by Miran in favor of a 50 basis point cut and one dissent by Schmid in favor of no cut. A hawkish dissent is not surprising, given that the dot plot from September had a few FOMC participants expecting no more cuts for the year.”
“We expect that quantitative tightening will be stopped as of the first of December. Treasuries maturing will also be reinvested into Treasuries, while mortgage paydowns will be directed into US T-bills.”
“The market reaction has been relatively muted given that most aspects went as expected. The FOMC is continuing in its path of getting closer to the ‘neutral rate,’ taking into account the risks to the employment side of the mandate. This is another ‘insurance’ cut and I don’t believe it indicates a series of further cuts into 2026, unless the job market significantly falters.”
NICK ELFNER, CO-HEAD OF RESEARCH, BRECKINRIDGE CAPITAL ADVISORS, BOSTON, MA:
“In the Fed’s monetary calculus, the downside risk to employment is outweighing the peril of rising inflation and supports their pivot to loosening monetary policy.”
“The Fed’s 25 basis point cut today and the prior one in September are an acknowledgement that they expect inflation to rise but at a slower rate and that the labor market has slackened sufficiently to warrant further accommodation to stimulate demand.”
“Solid economic growth and a lack of new data may augur for a pause at the December meeting, although markets are pricing in another Fed cut before the end of this year.”
RICK WEDELL, CHIEF INVESTMENT OFFICER, RFG ADVISORY, BIRMINGHAM, AL:
“While a lot of investors cheer rate cuts, and understandably so, I think in this context people need to be aware that the Fed is flashing a yellow caution light on the economy. They are highlighting the uncertainty that the market faces in terms of tariffs and unemployment, and also highlighting the lack of data that they have to make policy decisions in light of the government’s shutdown.”
“In the short run, the reaction is likely to be muted, given that pretty much everyone expected a 25 bps rate cut. There’s nothing overly dramatic in the policy statement, other than a note that they are no longer looking to shrink their balance sheet and drain reserves out of the market which is also a modest warning sign. I anticipate the larger market response will come based on Fed testimony, which will give us a glimpse as to how they may view rate cuts for the balance of 2025 and into early 2026.”
“While longer duration bonds were a dirty word a few years ago, we believe it is time to revisit that asset class as interest rates move lower. They also provide a nice hedge against economic weakness. So, in general, we feel that lengthening out the duration of your fixed income portfolio is not a terrible idea.”
CHRISTOPHER HODGE, CHIEF U.S. ECONOMIST, NATIXIS, NEW YORK:
“The most surprising part of the meeting was the dissent from Schmid. Powell has been very effective at rallying the FOMC to a consensus (excluding Miran) and presumably compromising on communication in exchange for a vote with the majority. I think we can expect more of this as Powell’s term as Chair comes to an end and the Fed’s mandate is stretched in both directions.”
MATT MISKIN, CO-CHIEF INVESTMENT STRATEGIST, MANULIFE JOHN HANCOCK INVESTMENTS, BOSTON:
“The Fed looks pretty divided again with some dissents going in opposite directions. With one wanting no cut and another wanting a 50 basis point cut it leaves you with a lack of clarity off the bat. But actions speak louder than words and cutting 25 basis points and announcing a plan for stopping quantitative tightening are both a dovish tilt that they delivered.”
“They’re still saying inflation remains somewhat elevated. What we keep thinking about is if it’s simply lagged because housing data has not fully caught up with the inflation rate. You’re going to see two camps read this. One will say it’s a policy mistake and that they shouldn’t have cut because the economy is fine. The other camp will say they didn’t update their statement to reflect the weakness in the job market and the lagged inflation data for housing.”
“I think the statement does not reflect weakness in the labor market and it’s suggesting inflation is hotter than the underlying data. It’s a difficult time to be a Fed member because the government is closed and the data quality keeps deteriorating. This adds to the issue.”
BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN:
“The end is near, for QT. Rather than risk a blow-up in short-term debt markets, it only made sense to stop QT. There were already some signs of stress, so there was little to be gained in pushing QT further.”
“In a head nod to the dearth of data, the Fed had to qualify the entire statement by saying “available indicators,” because there aren’t a lot of them with the government shutdown. The dissents weren’t surprising, so this was a no surprise kind of statement.”
“Chair Powell will likely do the verbal equivalent of shrugging his shoulders during the press conference if asked about future cuts.”
MICHELE RANERI, VICE PRESIDENT AND HEAD OF U.S. RESEARCH AND CONSULTING, TRANSUNION, CHICAGO:
“While the full economic impact of the Fed move will unfold over time, early indicators suggest that even a modest rate cut can have meaningful consequences for consumer behavior and financial health.”
“We’ve already observed a notable uptick in year-over-year activity across several credit products. Mortgage rates, in particular, have responded swiftly. Just in the past week, they fell to their lowest level in over a year.”
“While inflation continues to exert pressure on household budgets, rate cuts offer a potential counterbalance by lowering debt servicing costs. Though the broader implications for consumer financial health remain to be fully seen, the early signs point to increased credit activity and potential relief for borrowers. As we monitor the evolving landscape, we’ll continue to assess how monetary policy shifts are shaping consumer behavior and credit market dynamics.”
MICHAEL BROWN, SENIOR RESEARCH STRATEGIST, PEPPERSTONE, LONDON:
“As expected, and as had been fully discounted by money markets, the FOMC delivered a 25bp cut to the fed funds rate at the conclusion of the October meeting, lowering the target range to 3.75% – 4.00%.”
“Such a move marks the second straight rate cut from the Fed, following an equal move in September, and leaves the fed funds rate at its lowest level since the summer of 2022, as policymakers seek to prop up a stalling U.S. labor market, and as tariffs produce a lesser degree of upside inflation risks than had been anticipated a few months ago.”
(Compiled by the Global Finance & Markets Breaking News team)
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