Future Fed Rate Cuts Uncertain

Future Fed Rate Cuts ‘Far’ From Certain After a Divided Meeting

The Federal Reserve delivered a second straight 25 bp rate cut, trimming the federal-funds target range to 3.75%–4.00%. But Chair Jerome Powell used the press conference to puncture confidence in another cut this year, saying a December move is “far from” assured. Markets whipsawed: the Dow faded to a modest loss, the S&P 500 finished roughly flat, the Nasdaq notched another record, and the 2-year Treasury yield popped to 3.585%, its biggest one-day gain since early July.

A Hawkish Twist to a Dovish Decision

While the cut extends the Fed’s pivot toward cushioning a slowing jobs market, Powell underscored rising internal debate—a “growing chorus” skeptical of further easing with inflation still hovering near ~3% and tariff-related price pressures complicating the outlook. The policy vote was 10–2: Kansas City Fed’s Jeffrey Schmid preferred no change; Governor Stephen Miran dissented for a larger 50 bp move.

QT Ends for Treasurys; MBS Runoff Continues

Officials also set a Dec. 1 end date for the runoff of Treasurys, citing mounting signs that banking-system reserves are shifting from “abundant” toward merely “ample.” The Fed will continue MBS runoff but replace maturities with T-bills to avoid further draining term liquidity. The move aims to sidestep a repeat of the Sept. 2019 funding squeeze and responds to heavier use of backstop facilities that signal tighter money markets.

Data Blackout Raises the Bar for December

The ongoing government shutdown has delayed key labor and inflation reports, leaving officials in a data blackout. Powell said limited visibility could argue for caution on additional easing. September’s projections (the “dots”) narrowly favored two or more cuts in 2025 after September—but a sizeable minority opposed more moves without clearer labor-market deterioration.

How to Read the Reaction Function

Labor first: A sharper slowdown in jobs would push the Fed toward another cut; absent that, inertia favors a pause.
Inflation watchers: Any re-acceleration, especially from trade/tariff passthrough, strengthens the no-cut camp.
Financial conditions: New highs in equities and easier credit could argue against piling on more accommodation.
Liquidity plumbing: Ending Treasury QT should ease reserve frictions and reduce tail risk in money markets.

Market Implications

Rates: Front-end yields may stay sticky higher as December odds reprice; curve steepening risk if growth holds.
Credit: Funding relief from ending Treasury QT is a modest positive for banks and short-term credit.
Equities: Growth/AI segments benefit from lower discount rates, but a more conditional Fed raises event risk into December.
USD: Mixed—less QT and a cautious Fed can pressure the dollar, but higher front-end yields support it near-term.
Mortgages: Continued MBS runoff keeps spread pressure elevated even as reserve conditions improve.

Bottom line: The Fed’s easy cuts are likely behind us. Without clear evidence of a weakening job market, the Committee may prefer to pause in December—especially amid a data blackout and lingering inflation risks. Liquidity relief from ending Treasury QT lowers funding-market tail risks but doesn’t guarantee further easing.