FOMC meeting, October 29-30

Meeting recap

Blindfolded, divided and seeking optionality

• The Federal Reserve cut the federal funds rate by 25 basis points (bps) to a target range of 3.75%–4.00%, with Fed Chair Jerome Powell striving to regain policy optionality. The Federal Open Market Committee (FOMC) decision featured a rare two-sided dissent: Governor Stephen Miran favored a larger 50bps cut, while Kansas City Fed President Jeffrey Schmid opposed the cut. While Chair Powell underscored broad support for the decision, he emphasized “strongly diverging views” on the path ahead, asserting that a December rate cut is “not a foregone conclusion … far from it.”

• With no new official data amid the ongoing 29-day government shutdown, the FOMC statement relied on previously available data, noting that the economy “expanded at a moderate pace,” with slower job gains and higher inflation. The Fed highlighted elevated uncertainty and flagged that downside risks to employment “rose” in recent months.

• In the press conference, Powell stressed that there is “no risk-free path for policy,” seeking to reclaim optionality. He noted that with 150bps of cumulative rate cuts since early 2024, “we are closer to neutral,” signaling future policy easing could be slower and more data-contingent than what markets had been pricing. With most estimates of the neutral fed funds rate around 3.0%–4.0%, the Fed appears to be nearing the upper bound of policy neutrality.

• Powell’s tone was unusually direct, with multiple references to the December meeting being live. He noted that data disruptions from the shutdown could argue for caution, and acknowledged a growing number of policymakers who believe “we should at least wait a cycle” before cutting again.

• Perhaps most revealing were Powell’s comments on differing risk tolerances and the evolving internal dynamics of the FOMC. He emphasized that policymakers “take their role very seriously” and are committed to “doing what’s right for the American people,” while his reference to a robust policy debate (which will appear in the minutes) hinted at rising FOMC polarization.

• The Fed announced that the balance sheet runoff will end December 1, citing reserves nearing “ample enough” levels. All principal payments from the Federal Reserve's holdings of agency securities will be reinvested into Treasury bills, a tactical move to reduce duration risk and ease liquidity conditions, minimizing risks of a 2019-style funding squeeze.

• Looking ahead, a shift in the FOMC’s composition — with a more hawkish rotation among regional presidents and a potentially more dovish Board of Governors — could further intensify internal divisions and raise the likelihood of two-sided dissents.

• Our call for a 25bps rate cut in December is not “data agnostic”; it is grounded in our view of a softening labor market and a one-time tariff-driven inflation bump. However, in the absence of timely data — or if the economy proves more resilient — we expect the Fed to forgo a December cut. Beyond that, we anticipate a more modest easing cycle in 2026 totaling 50bps, with risks skewed toward less easing.

Against a backdrop of data scarcity and rising policy uncertainty, Fed Chair Jerome Powell openly acknowledged the growing divergence in views within the FOMC. The 29-day government shutdown has paralyzed the flow of official data, intensifying divisions between policymakers who prioritize downside employment risks and those wary of renewed inflationary pressures from tariffs.

Powell’s language during the press conference was unusually direct, warning that a December rate cut is “not a foregone conclusion. In fact, far from it.” He emphasized that risk tolerance varies across the Committee, with some policymakers “more averse to inflation overruns, and others more averse to underruns of employment.”

On inflation, Powell downplayed the risk of a sustained reacceleration, particularly from trade policy. As he explained, once tariffs are in place, they cease to generate ongoing inflation. “You have a one-time price increase. This is how we believe and hope that it will work out.”

He described the labor market as continuing to cool “gradually, but nothing more than that,” while acknowledging a divide among policymakers on the underlying drivers. “Some people argue this is a supply shock … Others argue, as I do, that there is an effect from labor demand and we should use our tools to support the labor market.”

Still, he cautioned against overreaction. “We do not see the labor market weakness accelerating … there is no story over the last four weeks. It is stable.” Yet he also pointed to rising announcements of layoffs and hiring freezes, possibly due to artificial intelligence-driven labor substitution.

On the investment front, Powell noted that some of the recent capital outlays — particularly into data centers — are not interest-sensitive. “It is based on longer-run assessments that this is an area that is going to drive higher productivity.”

As for financial stability, Powell offered reassurance. “We don’t look at any one asset price and say, hey, that is wrong. It’s not our job to do that. We look at the overall financial system … Banks are well capitalized … and households are in good shape financially.”

But the current expansion, he implied, rests on narrow foundations. Drawing from corporate earnings calls, Powell described a bifurcated consumer landscape, with lower-income households pulling back while the affluent continue to spend. As we’ve previously highlighted, the recovery now rests on three “A-pillars”: affluent consumers, AI-driven capex and asset price appreciation — each of which could fuel a virtuous cycle or quickly reverse course.

Powell also confirmed that quantitative tightening will effectively end on December 1. “The size of the balance sheet is frozen. As mortgage-backed securities mature, we will reinvest those into shorter-duration Treasury Bills.” He noted that “non-reserve liabilities, like currency, will continue to grow organically,” and “because the balance sheet is frozen, you have further shrinkage in reserves.” Over time, he added, the Fed will need to allow reserves to grow again to match the needs of the banking system and economy.

The Fed’s overarching objective remains clear: move policy from modestly restrictive to neutral — not into accommodative territory. In a final pushback against overly dovish expectations, Powell put it plainly: “If we do wind up resuming rate cuts at some point, we will. At some point, we are trying to get to the end of the cycle — with the labor market in a good place, and with inflation on its way to, or at, 2%.”

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.