As expected, the Fed lowered the federal funds target rate 25bps on Wednesday to a range of 3.75% to 4.00%, the second consecutive rate reduction this year and now marking a total of 50bps in cuts so far in 2025 and 150bps since September of last year.
Source: Stifel as of 10.30.2025
There were two dissents: Governor Miran dissented in favor of a -50bp reduction, while President Schmid dissented in favor of no change. There is an ongoing divide between the hawks and doves within the Fed, where Schmid’s dissent reinforces the notion that not all Fed officials are in support of a notably dovish pathway for rates.
Given an earlier downgrade in the Fed’s assessment of economic conditions, coupled with at least some evidence of a further cooling in the labor market, the Fed was widely expected for a second-round rate reduction this month. Thus, it was less a question of what the Fed would do this week and more of what the Fed should do. It appears we now face less clarity on the path forward regarding future rate reductions.
Market participants appear to be reading the dissent in a similar fashion to Powell’s somewhat hawkish commentary, with the probability of an additional cut by year-end lower than pre-meeting (about 72% chance of a 25bps cut in December as of 10/30). The reaction (less certainty on rate cuts) followed Powell’s comment, where he warned a rate cut in December is “far from a foregone conclusion.” The market has the terminal rate priced at 2.95% by April 2027, as about half a cut has been priced out of markets.
Ultimately, labor-market developments will be the bottom line in determining the Fed’s decision in December and beyond. If the job market stabilizes, the Fed likely pauses its normalization while refocusing on inflation (still notably above target). If the government is still shut down, the ADP release on November 5 will be a critical data point. If the government reopens, then payrolls on November 7 — if the report can be compiled in time — could make or break the chances for a December cut.
With the substantial economic recovery from an early dip into Liberation Day, and Q3 growth on track for a solid 3% pace, there appears to be a lower sense of urgency for the Fed to offer additional policy concessions (at least in the very near term).
Update on QT
Quantitative Tightening (QT) is (finally) now set to end on December 1st, with a partial roll into T-bills (the Fed’s implementation note indicated a plan to “reinvest all principal payments from the Federal Reserve’s holdings of agency securities into Treasury bills”). Money market conditions have been tightening, but the Fed seemed willing to accept the risk for another month.
Source: Stifel as of 10.30.2025
The Fed will invest the cash from coupons and the roll off from their MBS holdings (~$16.5bn/month) into the bill market. Maturing coupon issues will be reinvested across the curve using an allocation that matches the Treasury auction structure.
For Treasury, this supports the bill market and, by holding coupon auctions steady, brings demand to the longer part of the curve where there is less supply being created, with 85% of the issuance via Bills, compared with 82% in Q4 2024. Again, we believe this is yield curve control “lite” happening in action.
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