Fed cuts 5bps, ends QT, clouds December cut

 The Federal Open Market Committee (FOMC) of the US Federal Reserve lowered its benchmark overnight borrowing rate by 25bps to 3.75%-4%. The decision was taken by 10-2 vote, with one member voting for a 50bps cut and another voting against the cut. The Fed also announced that it would terminate the current process of the reduction of its asset purchases (quantitative tightening or QT) on 1^st December 2025.

The Fed chairman, Jerome Powell, however, cautioned the market against expectations that the December rate cut was a “foregone conclusion,” saying that it is “far from it.” He cited that there is a “a growing chorus” among the Fed officials to “at least wait a cycle” before cutting again.

Notably, after the September FOMC meeting, the Fed officials had indicated the probability of three cuts, including the one in December.

Job risks prompt the cut, tariff inflation seen as one=time increase

The FOMC decision to cut rate was primarily driven by the cooling job market. The post meeting statement of the FOMC stated that, “Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up but remained low through August; more recent indicators are consistent with these developments.”

Raising concerns over the job market, the FOMC statement read, “downside risks to employment rose in recent months.”

The statement also noted that “Inflation has moved up since earlier in the year and remains somewhat elevated.” However, Powell felt that the inflation increase due to tariffs will be a “one-time increase” and “it will come to end”.

QT set to end in November

Along with the interest rate decision, the Fed said its process of reducing the amount of bonds it holds on the central bank’s $6.6 trillion balance sheet will end on 30^th November 2025.

The Fed expanded its portfolio of Treasurys and mortgage-backed securities during the Covid crisis, pushing the balance sheet from just over $4 trillion to close to $9 trillion. In the past couple of years, the program, popularly known as QT, had unrolled appx $2.3 trillion off the Fed’s portfolio.

There are signs of tightening in short-term lending markets. To improve short term liquidity, From December the Fed will be investing proceeds from maturing mortgage securities into shorter-term bills.

Mr. Powell however clarified that “while the Fed found it necessary to shrink its holdings, he did not foresee a return to pre-pandemic levels”.

Market reaction

S&P500 and Nasdaq ended the day higher, though lower than the highs recorded before Powell’s cautionary note. Crypto ended 23% lower. Bond yields rose slightly (10-year Treasury to 4.12%), reflecting tempered cut expectations.