October FOMC meeting: Navigating the fog

The Federal Open Market Committee (FOMC) delivered another expected 25 basis point cut at its October meeting, lowering the benchmark policy rate to 3.75%-4.00%. It also announced an end to quantitative tightening beginning December 1, as the shrinking of its balance sheet has run its course. Two members of the Committee dissented from this month’s decision—one in favor of a more aggressive 50 basis point cut, and one in favor of no cut—compared to just one dissent in September, which favored a larger cut.

As the government shutdown continues, the Fed is navigating policy with limited key official data releases. For now, based on what’s available, the Fed seems comfortable with its decision to continue easing policy. Indeed, today’s rate cut reinforces the Fed’s risk management approach, reflecting the shift in the balance of risk toward labor market softness.

Current assessment

Inflation: Powell noted that the inflation outlook has not changed much since the September meeting. The FOMC continues to view tariff-driven goods inflation as a one-time price increase, though Powell noted that the risk of more persistent price pressures will be closely monitored. Importantly, long-term inflation expectations remain anchored, and disinflation in services is providing a counterbalance to goods price pressures.

Labor market: Echoing last month’s “risk management cut,” the FOMC emphasized that while risks to both sides of the Fed’s dual mandate persist, the balance of risk remains tilted toward labor market softness.

Although layoffs remain relatively low, firms curtailing hiring and announcing layoffs recently could be linked to the growing role of AI in the workplace. While these shifts have not quite shown up in claims data, the FOMC is monitoring them closely. Powell also pointed to structural factors weighing on labor supply—namely, declining labor force participation and lower immigration—which may be keeping the labor market in balance even as labor demand softens. Powell suggested that the Fed may continue using its policy tools to support labor market resilience ahead.

Liquidity: The decision to stop Quantitative Tightening on December 1 reflects growing caution around building pressures in funding markets, a sign of tightening liquidity within the financial system. The move should also better align the composition of its Treasury portfolio closer to that of recent issuance, with reinvestment flows going into shorter-duration Treasurys, providing support for this portion of the market.