Fed Cuts Rates by 25bps as Expected, but Powell Warns December Cut Is Far from a Done Deal

The Fed delivered a 25-basis-point rate cut as widely expected, marking its second consecutive reduction this year, and announced it would soon end its balance sheet runoff. However, Chair Jerome Powell poured cold water on dovish expectations, saying the move was primarily about risk management. He noted deep divisions within the FOMC and cautioned that the widely expected December rate cut is “not a done deal,” immediately cooling market optimism.

The Federal Open Market Committee (FOMC) voted 10–2 to lower the target range for the federal funds rate to 3.75%–4%, in line with market expectations. Two members dissented, signaling widening divisions within the committee. Kansas City Fed President Jeffrey Schmid preferred to keep rates unchanged, while Stephen Miran, a Trump ally and Fed Governor, argued for a 50-basis-point cut.

In addition to lowering rates, the FOMC announced it would end the reduction of its balance sheet on December 1. Currently, the Fed has been trimming its holdings by $50 billion in Treasuries and $35 billion in mortgage-backed securities (MBS) each month. After that date, principal repayments from MBS will be reinvested into short-term Treasury bills.

The statement noted that available indicators suggest the economy continues to expand at a moderate pace. Job gains have slowed this year, and while the unemployment rate has edged higher, it remained low through August. Recent data releases are consistent with these trends. Inflation has risen since earlier in the year and remains somewhat elevated. Given a shift in the balance of risks, the committee judged the 25-basis-point cut to be appropriate and said it will carefully assess incoming data, the evolving economic outlook, and the balance of risks.

Due to the ongoing U.S. government shutdown, federal agencies have suspended the collection and release of economic data, forcing the Fed to rely more on risk assessments—particularly concerning rising downside risks in the labor market.

The statement provided no forward guidance for the December meeting. In its September projections, the Fed had indicated the likelihood of three rate cuts this year. Powell, however, pushed back on that expectation.

The Fed Chair, who is set to step down in May next year, said a December rate cut should not be taken for granted: “There were strongly differing views about how to proceed in December,” Powell said during his post-meeting news conference. “A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it.”

Powell noted that data released before the shutdown suggested economic growth may have been somewhat stronger than expected, mainly driven by resilient consumer spending. However, inflation remains somewhat elevated, and data since the September meeting show little change in the outlook for employment and inflation. Under a reasonable baseline scenario, the impact of tariffs on inflation will likely be temporary. In the near term, inflation risks are skewed to the upside, while employment risks are tilted downward—a challenging mix. With labor market risks increasing in recent months, the balance of risks has shifted.

Powell added that interest rates are now approaching the neutral range—neither stimulating nor restricting economic growth. The Fed has cut rates by a cumulative 150 basis points, bringing them within the range of many neutral-rate estimates. Rates are not yet accommodative, he said, but are “considerably looser than before.” Some committee members believe it’s time to “step back,” and an increasing number think the Fed should wait until the next cycle to act further.

On balance sheet policy, Powell said that starting in December, the Fed will enter the next phase of normalization, maintaining the balance sheet at a stable level for some time. As other non-reserve liabilities (such as currency in circulation) continue to grow, reserve balances will gradually decline.

Powell also made rare comments on the current AI boom, calling artificial intelligence investment “clearly one of the important drivers of economic growth.” He contrasted it with the tech bubble of the 1990s, noting that unlike that era’s speculative surge, today’s AI leaders have strong revenues, distinct business models, and solid profitability.

Still, with Powell set to leave office in May and Donald Trump actively vetting candidates for the next Fed Chair, his influence will likely wane. Trump has long pushed for lower interest rates, and the next Fed leader is expected to align more closely with his policy direction. Even if the Fed doesn’t cut again in December, the medium- to long-term trend toward lower interest rates remains intact.