December rate cut not a foregone conclusion
Summary
On Wednesday, October 29, 2025, the Federal Open Market Committee (FOMC) voted to cut the Federal Funds rate by 25 basis points (bps), to a target range of 3.75%-4.00%. This marks the second cut in 2025, following ongoing concerns about the weakening U.S. labor market and rising unemployment. In the midst of a government shutdown that is now approaching the 1-month mark, the FOMC cited “available indicators” in light of the delays in federal economic data releases. The Committee reaffirmed its dual mandate of promoting maximum employment and returning inflation to 2%. The statement released reiterated that job gains slowed this year, the unemployment rate edged up, all while inflation has slightly increased since earlier in the year and remains somewhat elevated. Newly appointed Fed Governor Stephen Miran dissented against the Committee’s decision for the second straight meeting, in favor of lowering rates by 50 basis points. Kansas City Fed President Jeff Schmid also dissented, but against a rate cut altogether. This is the first time we have seen dissents on each side of a decision since 2019. The Fed also announced that its balance sheet runoff will end on December 1, 2025. The Fed board will continue to monitor data to guide its decisions.
Impact on rates
In line with Powell’s rhetoric, expect the market to continue to remain focused on inflation and the U.S. labor market, despite delays in some data releases due to the government shutdown. If the labor market continues to show signs of weakening or inflation persists above the target range, this may translate to fewer rate cuts into 2026 and potentially further dissenting amongst the Committee members on both sides of the policy spectrum. Powell stated that economic activity has been rising at a moderate pace, but the higher downside risk has shifted to the labor market. Starting December 1st, the Fed will end Quantitative Tightening (QT) and hold its balance sheet steady following the gradual reduction of $2.2 trillion over the past 3 years. As non-treasury bills mature, the Fed will purchase treasury securities as replacements to maintain its balance sheet. The Fed’s statement noted that economic uncertainty remains elevated, and the Committee will continue to be attentive to both sides of its dual mandate.
Source: Chatham Financial
Moving forward
The market will remain focused on inflation and the U.S. labor market, despite the limited data. If the labor market continues to weaken or inflation remains above the target range, it may give way to further dissent among the Committee members on either side. Powell stated that economic activity has been rising at a moderate pace, but that the higher downside risk has shifted to the labor market. The end of Quantitative Tightening (QT) will pause the balance sheet reduction, which will take place December 1. The Fed will hold its balance sheet steady after its gradual reduction of $2.2 trillion over the past 3 years. As non-treasury bills mature, the Fed will purchase treasury securities as replacements to maintain its balance sheet. The Fed’s statement noted that economic uncertainty remains elevated, and the Committee will continue to be attentive to both sides of its dual mandate.
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Disclaimers
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
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