The United States Federal Reserve lowered interest rates on Wednesday (Thursday AEDT) to their lowest level in three years, marking its second rate cut in 2025 amid headwinds from the federal government shutdown and President Donald Trump’s tariffs.
By a 10-2 vote, the Federal Open Market Committee (FOMC) reduced its benchmark overnight borrowing rate to a target range of 3.75%-4%.
The move was widely anticipated by markets, following weeks of weaker economic data and mounting uncertainty.
Two committee members dissented. Stephen Miran, appointed by Trump days before the September meeting, once again voted against the majority, arguing the rate cut should have been deeper.
Jeffrey Schmid, president of the Kansas City Fed, voted instead to leave rates unchanged.
The Fed also announced that it would halt the reduction of its balance sheet, known as quantitative tightening (QT), on 1 December.
The program has reduced roughly US$2.3 trillion from the central bank’s holdings of Treasurys and mortgage-backed securities.
Instead of reinvesting proceeds from maturing assets, the Fed had been allowing them to roll off its balance sheet each month.
However, recent stress in short-term lending markets prompted policymakers to conclude that liquidity conditions had tightened sufficiently.
“Our long-stated plan has been to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions. Signs have clearly emerged that we have reached that standard,” Powell noted in his opening statement.
The FOMC also warned of rising risks to employment, noting that “downside risks to employment rose in recent months”.
Although the Bureau of Labor Statistics’ jobs report remains suspended due to the shutdown, the agency’s September inflation report showed prices climbing 3% annually, the highest since January.
“Higher tariffs are pushing up prices in some categories of goods, resulting in higher overall inflation,” Powell noted. “A reasonable base case is that the effects on inflation will be relatively short-lived—a one-time shift in the price level.
"But it is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed.”
Fed Chair Jerome Powell reiterated that future policy decisions will depend on incoming data. The statement noted that “a further reduction in the policy rate at the December meeting is not a foregone conclusion" as “policy is not on a preset course”.
“We haven’t made a decision about December, and you know, we’re going to be looking at the data that we have, how that affects the outlook and the balance of risks,” Powell added.
Powell also acknowledged the economic drag caused by the government shutdown. “The shutdown of the federal government will weigh on economic activity while it persists, but these effects should reverse after the shutdown ends.”
Treasury yields rose following the decision as investors recalibrated expectations for inflation and monetary policy. The 10-year Treasury yield climbed 2.5% to 4.078%, and the 2-year yield jumped 3% to 3.596%.
