The Federal Reserve approved its second consecutive interest rate cut on Wednesday but stopped short of promising more reductions this year, sending mixed signals to investors.
In a 10-2 vote, the Federal Open Market Committee lowered its benchmark rate to a range of 3.75% to 4%, marking the lowest level in three years. The Fed also announced that it will end its balance sheet reduction program, known as quantitative tightening, on December 1.
Governor Stephen Miran dissented, pushing for a larger half-point cut, while Kansas City Fed President Jeffrey Schmid voted against the move, preferring to keep rates unchanged. Both dissenting votes reflected the growing divide within the committee. Miran, a Trump appointee, has been vocal about the need to ease monetary policy more aggressively to support growth.
The new rate will influence borrowing costs on products such as auto loans, mortgages, and credit cards. Still, Fed Chair Jerome Powell made clear that another rate cut in December is far from guaranteed.
“In the committee’s discussions at this meeting, there were strongly differing views about how to proceed in December,” Powell said during a post-meeting news conference. “A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it.”
He noted “a growing chorus” among the 19 Fed officials who prefer to “at least wait a cycle” before making another move. Following Powell’s remarks, traders lowered expectations for a December cut to 67%, down from 90% a day earlier, according to CME Group’s FedWatch.
Stocks initially rose after the rate decision but fell as Powell’s comments signaled a more cautious stance. Markets later stabilized as investors digested the broader message.
The latest cut came despite the Fed having limited access to fresh economic data due to the ongoing government shutdown. Other than last week’s consumer price index report, key data such as jobs figures and retail sales remain unavailable.
“Available indicators suggest that economic activity has been expanding at a moderate pace,” the Fed said in its post-meeting statement. “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. Inflation has moved up since earlier in the year and remains somewhat elevated.”
The updated language marked a subtle but important shift from September, when the Fed said activity had merely “moderated.” Officials now see growing risks in the labor market, with “downside risks to employment” rising in recent months.
Even before the shutdown, signs of a cooling job market were evident, with hiring slowing despite relatively few layoffs. Inflation, meanwhile, continues to exceed the Fed’s 2% target. The latest CPI data showed a 3% annual increase, fueled by higher energy costs and products affected by President Donald Trump’s tariffs.
The Fed’s balance sheet reduction program, which had cut about $2.3 trillion from its holdings of Treasurys and mortgage-backed securities, will officially conclude in December. The central bank will redirect maturing mortgage proceeds into short-term Treasury bills, a move intended to maintain liquidity in financial markets.
The Fed expanded its asset holdings during the Covid-19 crisis, growing its balance sheet from just over $4 trillion to nearly $9 trillion before beginning its gradual unwind. It now sits at around $6.6 trillion. Powell has said the central bank does not plan to shrink its holdings back to pre-pandemic levels.
Some analysts believe the Fed could resume bond purchases as early as 2026 if market conditions warrant it. Despite rate cuts during an ongoing bull market, history suggests that such moves often sustain equity gains, though they also risk reigniting inflationary pressures that once forced the Fed into aggressive tightening.
For now, Powell emphasized caution as the central bank navigates uncertain data and competing economic signals, leaving investors to watch closely how the Fed will proceed in December.
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