Fed Delivers Second Consecutive Rate Cut and Announces End of Balance-Sheet Runoff

The U.S. Federal Reserve lowered its benchmark interest rate for the second meeting in a row on Wednesday, trimming the federal funds target to a range of 3.75%–4%. The decision, reached by a 10–2 vote of the Federal Open Market Committee (FOMC), also set Dec. 1 as the final day for its balance-sheet reduction program, commonly known as quantitative tightening.

While the move matched broad market expectations, Chair Jerome Powell used his post-meeting press conference in Washington, D.C., to signal that another cut at the FOMC’s next gathering is far from guaranteed. “Strongly differing views” emerged among the committee’s 19 participants, he said, adding that a growing number favor pausing in December. Futures traders, who had assigned a 90% probability to a December cut as recently as Tuesday, lowered that estimate to roughly 67% after Powell’s remarks, according to CME Group data.

Split Votes on Direction and Pace

Kansas City Fed President Jeffrey Schmid and Governor Stephen Miran cast dissenting votes from opposite sides of the policy debate. Schmid preferred no rate change, while Miran—an appointee of former President Donald Trump—argued for a larger, half-percentage-point reduction. All other voting members supported the quarter-point move.

The new target range serves as a benchmark for a wide array of consumer and business financing, including mortgages, auto loans and credit-card rates. Before the latest adjustment, the Fed had already reduced rates once this year, in September, in an effort to cushion the economy against slowing employment growth and persistent inflation above the central bank’s 2% goal.

Quantitative Tightening to Conclude

In a separate decision, policymakers agreed to halt the runoff of Treasury and mortgage-backed securities from the Fed’s $6.6 trillion balance sheet. Since early 2023 the program has allowed up to $95 billion in securities to mature each month without reinvestment, shrinking holdings by roughly $2.3 trillion. An accompanying implementation note indicated that proceeds from maturing mortgage bonds will be reinvested in short-term Treasury bills once the runoff stops.

Market participants had widely anticipated an end to quantitative tightening by year-end after short-term funding costs showed signs of strain. Powell reiterated that officials do not plan to return holdings to their pre-pandemic level of about $4 trillion, though some analysts see a possibility that net purchases could resume as soon as 2026 if reserve demand increases.

Data Fog Complicates Outlook

The policy decisions arrived amid an unusual lack of economic information. A partial federal government shutdown has suspended most data releases, leaving the FOMC with little beyond last week’s consumer price index report. That release showed headline inflation running at 3% year over year, aided by higher energy prices and goods affected by Trump-era tariffs.

The post-meeting statement reflected the limited visibility, noting that “available indicators” point to moderate economic growth. Job gains “have slowed this year,” and the unemployment rate has “edged up but remained low through August,” it said. The committee also warned that “downside risks to employment” have increased in recent months, a shift from September’s language that had focused more heavily on inflation risks.

Imagem: imagem internet 19

Within the statement, the Fed acknowledged that inflation “remains somewhat elevated,” a phrase that replaces last month’s description of prices “running above” the target. Powell emphasized that officials continue to balance their dual mandate of maximum employment and price stability, but he suggested that softness in the labor market now warrants closer attention.

Market Reaction

Equity indexes, which initially rose on news of the rate cut, turned lower as Powell spoke. Major averages later pared losses, helped by gains in large technology shares and a solid start to the corporate earnings season. Government bond yields declined modestly, and the U.S. dollar strengthened against major currencies.

The Fed’s decision marks only the fourth instance since 1990 in which it has reduced rates while equity markets hover near record highs. Historical data show that stocks often continue to advance during such easing cycles, but looser policy can also reignite inflation pressures, potentially forcing a later tightening campaign.

Next Steps

The committee’s final meeting of the year is scheduled for Dec. 17–18. Powell underscored that incoming data will guide future actions, though the ongoing data blackout could complicate that assessment unless federal agencies resume normal operations. A full calendar of economic releases is available on the Federal Reserve’s website.

For now, the fed funds rate stands 1.25 percentage points below its 2024 peak, and the central bank’s balance sheet will stop shrinking in just over a month. Whether the Fed extends its easing cycle in December will depend on inflation, labor-market trends and the restoration of routine economic reporting.

Crédito da imagem: Jim Watson / AFP