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- The Fed is expected to cut rates by 25 basis points on Wednesday amid soft inflation and a weak labor market.
- With the government shutdown delaying key reports, the Fed continues to rely on private data sources.
- Markets watch for signals on an end to quantitative tightening, as policymakers remain divided.
The Federal Reserve is expected to lower interest rates by 25 basis points in its upcoming meeting on Wednesday, potentially marking the central bank’s second cut this year.
The expected move plans to support the labor market and keep inflation in check. Despite the delay in key economic data due to the government shutdown, the Fed still has access to other indicators from private sources.
For example, the latest US inflation report came in softer than expected, leading markets to price in more rate cuts ahead.
What to Expect from the October Meeting
The FOMC is widely expected to cut rates by 25 basis points, setting interest rates at 4% and marking its lowest level since December 2022. Markets have priced in a 97% chance of this cut.
Fed Chair Powell will speak at a news conference shortly after the decision and is expected to provide insights on future decisions and forecasts. ⁽¹⁾
The labor market has shown signs of a slowdown since the summer, with the unemployment rate rising to 4.3% in August. Unemployment claims also rose, as the overall labor market faced weakness due to tariffs and squeezing budgets.
The latest report for September showed that inflation rose 3% YoY, less than expected. Tariffs have not actually pushed prices up as markets initially thought, which keeps the Fed laser focused on the labor market. ⁽²⁾
Impact of Government Shutdown and Delayed Data Releases
The ongoing government shutdown, which began earlier this month, has delayed most economic data, including the September jobs report. Instead, the Fed has been using other public and private data sources to assess economic performance. Powell said that the outlook for employment and inflation has not changed much since September. ⁽³⁾
Without the jobs report, the October cut seems inevitable as the shutdown has suspended federal workers and might lead to more job losses.
Between now and December, the Fed could get three months of data if the shutdown ends. Global trade developments also play a major role in the Fed’s decision and to determine their outlook for prices and growth. ⁽⁴⁾
Quantitative Tightening and Balance Sheet
Traders will keep an eye out on whether the Fed opts to end its quantitative tightening (QT) program. QT has reduced the Fed’s balance sheet by $2.2 trillion since 2022 and has drained reserves for banks. ⁽⁵⁾
Powell said that liquidity tightening is showing, meaning that money and credit are becoming harder to access, hinting that QT could end in the coming months. Some think it could even come to a halt this week. Ending QT would follow years of quantitative easing that started after the financial crisis. ⁽⁶⁾
Divisions Within the Fed
The Fed is under pressure from the Trump administration to lower rates, alongside divided opinions among the committee. Some policymakers remain cautious on rate cuts and are worried that inflation could stay above 2% for years.
Other policymakers stated that more cuts are needed to avoid further weakness in the labor market.
St. Louis Fed President Alberto Musalem supports cuts if labor risks continue to grow and inflation remains contained. Fed governor Christopher Waller wants to avoid refueling inflation by cutting too fast. ⁽⁷⁾
Stephen Miran, a new Fed board member, is pushing for steep cuts. He said that Trump’s policies, like immigration changes, could lower inflation by reducing housing demand.
Market Bets and Future Outlook
Financial markets speculate that rate cuts could also happen in December and January. The Fed’s statement in its previous meeting mentioned more adjustments, possibly leading to more rate cuts.
The Fed aims for a balanced approach. At the moment, they are treading with caution amid risks to both inflation and employment.
