The US Federal Reserve delivered another widely expected 25 basis point rate cut at its October meeting, lowering the federal funds rate to a target of 3.75–4.00 per cent.
The move marked the second consecutive “risk management” cut since September, as the Fed sought to cushion the economy against signs of labour market softening – even as inflation remains above target.
At the same time, policymakers announced an end to quantitative tightening from 1 December, signalling a shift towards more accommodating conditions.
The decision came with two dissents: one member favouring a larger 50-point cut and another preferring to hold rates steady – a sign of growing division within the Federal Open Market Committee (FOMC), according to market strategist Christian Floro from Principal Asset Management.
With the ongoing US government shutdown and limited market data available, Floro noted that the central bank is operating in a rare information vacuum. The shutdown has also prevented the Fed from being able to provide clear forward guidance about December’s meeting.
“The Fed is navigating policy with limited key official data releases.
“Today’s rate cut reinforces the Fed’s risk management approach, reflecting the shift in the balance of risk toward labour-market softness,” he wrote in a note on 30 October.
Fed chair Jerome Powell acknowledged during his rate cut announcement that while inflation remained somewhat elevated, the broader picture was unchanged materially on last month.
“The FOMC continues to view tariff-driven goods inflation as a one-time price increase, though Powell noted that the risk of more persistent price pressures will be closely monitored,” Floro said, adding that long-term inflation expectations “remain anchored”.
According to Floro, the central bank’s tone reflected a subtle but important shift towards prioritising employment stability. He explained that while lay-offs remain relatively low, signs of slower hiring and restructuring are emerging, in part due to the growing role of artificial intelligence.
As well as this, he noted Powell’s emphasis on structural factors, including declining participation and weaker immigration, which are influencing labour supply.
Meanwhile, Floro explained that the Fed’s decision to end quantitative tightening highlighted growing caution about tightening liquidity in the financial system. Starting in December, proceeds from maturing mortgage-backed securities will be reinvested into shorter-duration Treasury bonds, aiming to help stabilise funding markets.
However, the announcement failed to meet some investors’ expectations for earlier reinvestment and more explicit forward guidance, as noted by Ray Sharma-Ong, deputy global head of multi-asset bespoke solutions at Aberdeen Investments.
“Equity and rate markets reacted negatively to Powell’s hawkish tone during the press conference, reinforcing the ‘bad news is good news’ framework: weaker data would likely prompt further easing, which could support equity markets,” Sharma-Ong said.
“Once the shutdown ends and macroeconomic data becomes available, we expect it to support a Dec 25 rate cut.”
What comes next?
The focus now turns to the next meeting in December, with Powell pushing back against expectations of another near-term cut, saying a further reduction is “far from a foregone conclusion”.
Still, many economists are convinced the Fed will deliver one more cut by the end of the year.
As economist from PIMCO, Tiffany Wilding, put it: “We still expect the Fed to cut rates another 25 basis points in December but concede this is a close call.”
She added that much will depend on whether government data resumes and if it shows further deterioration in the labour market.
Beyond December, however, opinions diverge sharply.
Speaking during a CIO roundtable earlier this week, Charles Tan, senior vice president and chief investment officer for global fixed income at American Century, indicated a more conservative outlook on rate cuts for the coming year.
He noted FOMC members are already divided on the matter. Contrasting with market expectations, which are pricing in approximately three cuts, Tan said the asset manager predicts there will be reduced to just one more cut.
He based this projection on the likelihood of the US economy re-accelerating into 2026, citing three strong tailwinds: capital spending, particularly in AI and other sectors that enhance productivity; large consumer tax refunds that could significantly stimulate spending; and the Fed’s own easing cycle.
“We’re not really concerned about economic slowdown or recession,” Tan added. “We’re more concerned about the Fed perhaps over-easing and the economy overheating into 2026.”
Wilding similarly said she expects greater fiscal stimulus next year through tax cuts and credits but cautioned that new tariffs are “creating winners and losers”, complicating the adjustment process for exposed industries.
Implications for investors
American Century’s senior client portfolio manager, Joyce Huang, highlighted that many investors would likely interpret the Fed’s easing cycle as a chance to boost their risk exposure.
This could involve investing in specific stocks, as well as long-maturity bonds, which are typically associated with increased performance potential and higher prices when interest rates fall.
However, Huang emphasised that investors could improve their risk/reward potential by maintaining a broadly diversified portfolio with long-term strategies, while also staying informed about emerging opportunities.
“As the Fed lowers rates and the growth outlook seems bright, we believe it may be prudent to put cash to work across the financial markets,” she added.
