Fed cuts another 25 bps; but hints at end of rate cuts for 2025

30 Oct 2025 , 10:50 AM

RATE CUTS COME WITH A CAVEAT

Ahead of the October 28-29 meeting of the Federal Open Markets Committee (FOMC), the debate was whether the Fed would cut rates by 25-bps or by 50-bps. That debate was not surprising. Powell and other members of the Fed like Michelle Bowman and Neil Kashkari had underlined that the risk of unemployment was more serious than the risk of inflation. Hence, the assumption was of 2 more rate cuts in 2025, possibly front-loaded in October itself. Eventually, the Fed decided to settle for a 25-bps rate cut in October.

However, what was critical was Powell’s cautionary note in his statement; not to expect more rate cuts in 2025.  That was, probably, an indication that markets can expect the next rate cut from the Fed only in 2026. There are two reasons for this shift in view. Firstly, inflation continues to be sticky, with the latest CPI inflation reading at 3.0%, a full 100-bps above the Fed target. Secondly, with the US under shutdown since 01-October, data flows have been erratic. Even the CPI inflation for September was put out 12 days late.

There was another important decision taken in the October Fed meet. The Fed has stopped the drawdown of its balance sheet, which it has been doing since 2022 to reduce the size of the balance sheet. The Fed balance sheet had bloated to about $9 Trillion due to COVID liquidity infusion. Over the last 3 years, that has tempered to $6.6 Trillion. It is still much higher than pre-COVID levels, but the Fed has decided to freeze additional drawdowns on the balance sheet to ensure adequate liquidity. That will be compensatory.

WHAT WE READ FROM OCTOBER 2025 FOMC STATEMENT

At Jackson Hole in late August, Powell had committed to rate cuts, and he has since delivered 2 rate cuts. Here is what we read from the Fed statement.

• The 25-bps Fed rate cut was passed by a vote of 10-2. Fed Governor Stephen Miran called for 50 bps rate cut, while Kansas City Fed President Jeffrey Schmid wanted status quo on rates. Clearly, the view on rate outlook is getting increasingly divergent.
• There is a point to be noted on the quality of data. With the US under shutdown since 01-October, there was no jobs report in October, and the CPI inflation came in 12 days late. Other economic data are of dubious quality due to erratic data flows.
• In his post-policy statement, Fed Chair Jerome Powell underlined that while the risk to employment was still elevated, inflation was not relenting, either, due to tariffs. Hence, Fed may be cautious on any further rate cut in 2025. This could be the last for the year.
• Apart from the inadequate data flows, Powell also underlined the extremely divergent views of FOMC members. This was almost unprecedented and pointed to the need to be more calibrated rather than just going by a majority vote.
• Fed has made an interesting point in its statement. While the spending appears to be robust overall, much of the spending is coming from the higher income groups, while lower income groups continue to be stressed. Also, the economic growth is being driven by business investments, which is not translating into jobs growth for now.
• Also, with inflation at 3.0% and quality data flows still not forthcoming, the Fed may have to be cautious in December 2025. Powell also underlined that while the risk of persistent inflation had reduced substantially, one cannot wish away the fact that tariffs still exist and inflation is well above 2%.
• An important move to infuse liquidity was to restart limited purchases of Treasury securities. This reverses the drawdown of the Fed balance sheet, which has already been brought down from $9.0 Trillion to $6.6 Trillion.

To sum up, it is not just the debate of inflation versus jobs; but, also, about how to drive in the fog. Data-driven decisions are hard to make in the absence of credible data.

WHY A DECEMBER RATE CUT LOOKS LESS LIKELY?

There are 3 reasons why it looks increasingly unlikely that the Fed will undertake another 25-bps rate cut in December. Firstly, the FOMC itself looks internally divided about the trajectory of rates with members increasingly veering towards status quo on rates. In such cases, a simple majority would be flawed. Secondly, while the rate cuts are helping GDP growth, that is not translating into jobs growth. The core objective is not being met.

Thirdly, as Powell himself admitted, the FOMC was driving in the fog. Data flows have almost dried up and Fed is basing its inferences on data packets from different sources. According to Powell, that may be a risky situation to take any affirmative view. Last, but not the least, the markets cannot underestimate the impact of inflation, which remains sticky, if not persistent. Liquidity was, anyways, being addressed by restarting asset purchases.

WHAT IS THE ROAD AHEAD FOR FED RATES?

Here are the CME Fedwatch probabilities of rate moves at selected upcoming Fed meets.

Fed Meet	175-200	200-225	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425
Dec-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	67.8%	32.2%	Nil
Jan-26	Nil	Nil	Nil	Nil	Nil	Nil	Nil	22.5%	56.0%	21.5%
Mar-26	Nil	Nil	Nil	Nil	Nil	Nil	8.6%	35.2%	42.9%	13.3%
Jun-26	Nil	Nil	Nil	Nil	2.4%	15.8%	36.6%	34.4%	10.4%	0.4%
Sep-26	Nil	Nil	Nil	0.9%	7.4%	23.4%	35.4%	25.4%	7.1%	0.4%
Dec-26	Nil	Nil	0.5%	3.6%	13.1%	27.1%	31.5%	19.1%	4.8%	0.3%
Mar-27	Nil	0.1%	0.9%	4.7%	14.7%	27.5%	30.1%	17.5%	4.3%	0.3%
Jun-27	Nil	0.2%	1.3%	5.3%	13.9%	24.0%	27.1%	19.0%	7.7%	1.6%
Sep-27	Nil	0.2%	1.1%	4.5%	12.3%	22.1%	26.5%	20.5%	9.8%	2.9%

Data source: CME Fedwatch

Post the October 2025 Fed meeting, there have been some interesting changes that have happened in the overall Fed rate pricing structure.

• The probability of a rate cut in December has come down drastically from over 93% to just around 67%. This can be attributed to the statement made by Jerome Powell underlining that the Fed may be cautious about more rate cuts in 2025.
• Surprisingly, the CME Fedwatch is factoring in a fairly high chance of a rate hike in the first quarter of 2026. The assumption is that once the data flows commence, the inflation surge may be more than expected.
• Broadly, the CME Fedwatch is factoring in no more rate cuts in 2025 and just about 2 more rate cuts in 2026 in a best-case scenario. Of course, data beyond that is not entirely reliable due to the time lag and the state of macro flux.

Compared to September, the optimism over sustained rate cuts has reduced substantially in October. Apparently, the problems are complex and quality data is not forthcoming. As the old piece of wisdom goes, “When in doubt, opt for status quo.”