The Federal Reserve once again cuts interest rates by 25 basis points. Powell says the rate cut in December is not a foregone conclusion.

The Federal Reserve cut interest rates for the second time on Wednesday, but Chairman Powell's subsequent remarks significantly cooled the market as he released significant uncertainty about whether there would be another rate cut in December. The Federal Open Market Committee voted 10-2 to lower the federal funds target rate range to 3.75%-4%, and announced that it would end the balance sheet reduction (QT) on December 1. Two officials dissented, with Federal Reserve Governor Milan calling for a one-time 50 basis point rate cut to loosen policy faster, while Kansas City Fed President Schmid believed that no rate cut was necessary. Milan is a Trump appointee, and Trump has recently been openly pressuring the Fed to cut rates quickly. The statement did not provide forward guidance on the December policy path. The September dot plot had shown the possibility of a total of three rate cuts this year, with December being the last meeting of the year. Powell stated during a press conference that there was a "strong division" in the committee about whether to cut rates in December, and that it is not a done deal. He also mentioned that "an increasing number of voices" among the policymakers are leaning towards "at least wait one cycle" before taking action. CME FedWatch showed that after Powell's speech, market bets on a rate cut in December dropped from 90% the previous day to 67%. U.S. stocks initially rose after the announcement, but turned lower after Powell's comments, and then slightly recovered. This rate cut occurred in a situation where the Federal Reserve lacks official data. Apart from last week's CPI release, the U.S. statistics system has been affected by the government shutdown, leading to key macroeconomic data such as nonfarm payrolls and retail sales not being updated. The statement also adjusted the economic description, stating that "existing indicators show that the economy is expanding at a moderate pace, the labor market is cooling, job growth is slowing, the unemployment rate has risen slightly but remains low; inflation has risen since the beginning of the year and is still high," and reiterated that "the risks to the outlook for employment have increased in recent months." Although signs of a slowdown were evident before the shutdown, layoffs were not out of control, but hiring had noticeably slowed down. Inflation still remains above the 2% target. The CPI annual rate was 3% last week, driven by higher prices in energy and items directly or indirectly related to Trump's tariffs. The Fed is trying to balance between "full employment" and "price stability," with recent comments showing a slight increase in the weight on the risks to employment. In tandem with the rate cut, the Fed announced the end of balance sheet reduction. Since QT, the Fed's balance sheet has declined from nearly $9 trillion after the pandemic to around $6.6 trillion, reducing approximately $2.3 trillion in bonds. Considering signals of tightening in the short-term financing market, the FOMC believes that continuing balance sheet reduction could lead to financial conditions tightening, and will reinvest in short-term debt after mortgage-backed securities mature. The market had already anticipated that QT would end by the end of the year at the latest. Powell had previously stated that the asset size would not return to the pre-COVID levels. Evercore ISI analyst Guha even predicts that the Fed may restart asset purchases in early 2026 due to "organic growth." Historically, the Federal Reserve has rarely eased monetary policy in the background of economic expansion and stock market highs, but the current market reaching new highs driven by AI technology and strong earnings reports has seen rate cuts historically associated with continued market gains. However, the shift to accommodative policy needs to consider the potential costs of rising inflation.