Fed Rate Cut Amid Liquidity Concerns and Policy Split

Fed Implements Cautious Rate Cut to Support Economy

In a closely watched decision, the U.S. Federal Reserve cut its benchmark interest rate by a quarter of a percentage point on Wednesday, October 29, 2025, aiming to ease tightening liquidity conditions in financial markets. The rate adjustment, lowering the federal funds rate to a range of 3.75% to 4.00%, came alongside the central bank’s announcement of limited Treasury security purchases to ensure smooth market functioning.

Policy Divisions Reflect Ongoing Economic Uncertainty

The decision revealed a divided committee. Governor Stephen Miran pushed for a deeper rate cut to bolster economic momentum, while Kansas City Fed President Jeffrey Schmid opposed any reduction, citing persistent inflation pressures. The 10-2 vote underscored the challenges the Fed faces in balancing inflation control with employment support during a period of restricted data availability caused by the ongoing federal government shutdown.

Adjustments to Balance Sheet Management

The Fed also confirmed changes to its balance sheet strategy, pledging to maintain its overall holdings on a monthly basis starting December 1. However, it plans to reinvest proceeds from maturing mortgage-backed securities into short-term Treasury bills — a move designed to sustain liquidity while gradually shifting the portfolio toward safer assets.

Market Response and Investor Expectations

Following the announcement, U.S. stock indexes showed modest gains, while Treasury yields edged higher, reflecting investor confidence in the Fed’s measured stance. Traders anticipate another rate cut at the central bank’s December meeting, with a further easing cycle possibly continuing into early 2026. Alexandra Wilson-Elizondo, Global Co-Chief Investment Officer at Goldman Sachs Asset Management, noted that “anchored expectations and soft inflation data support a cautious easing bias,” suggesting that another 25-basis-point cut remains likely in December.

Economic Outlook Under Data Constraints

With official labor statistics unavailable since August due to the shutdown, policymakers based their outlook on partial indicators suggesting moderate economic growth. The Fed acknowledged that “downside risks to employment have risen in recent months,” indicating growing concern about potential labor market weakness despite steady economic activity.

Inflation Trends and Policy Outlook

Inflation remains above the Fed’s 2% target, though it has not surged as sharply as initially predicted following the Trump administration’s import tariffs. The Personal Consumption Expenditures (PCE) Price Index — the Fed’s preferred inflation measure — rose from 2.3% in April to 2.7% in August, with projections showing it could reach 3% by year-end before easing gradually. Policymakers believe inflationary pressures will moderate over time, but acknowledge the risk of further economic softening if job growth continues to slow.

A Rare Dual Dissent at the Fed

The meeting’s outcome marked only the third instance since 1990 where Federal Reserve officials dissented in opposite directions — one advocating for greater easing and another for tighter policy. This rare split highlights the complexity of the current economic environment, as the Fed seeks to sustain growth while navigating inflation uncertainty and data limitations.

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Sorit Chaudhary

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