Fed cuts rates for the second time this year, will end balance sheet run-off in December

Core Viewpoint - The Federal Reserve has approved its second consecutive interest rate cut, lowering the benchmark overnight borrowing rate to a range of 3.75%-4%, despite limited visibility on the economy due to a government shutdown [2][3] Interest Rate Decision - The Federal Open Market Committee (FOMC) voted 10-2 to implement the rate cut, with dissenting opinions regarding the pace of the cut [2][3] - The decision to end quantitative tightening (QT) will take effect on December 1, 2025, marking a shift in the Fed's monetary policy approach [2][7] Economic Indicators - The Fed acknowledged uncertainty in economic conditions due to the suspension of key data collection, including nonfarm payrolls and retail sales [4] - Available indicators suggest moderate economic expansion, with job gains slowing and the unemployment rate remaining low [5][6] - Inflation remains elevated at an annual rate of 3%, influenced by higher energy costs and tariffs [6] Labor Market Concerns - The Fed expressed concerns over rising downside risks to employment, noting a flattening pace of hiring despite contained layoffs [6][7] - The balance between full employment and stable prices is becoming increasingly challenging for policymakers [7] Balance Sheet Management - The Fed's balance sheet, which expanded from over $4 trillion to nearly $9 trillion during the Covid crisis, will not return to pre-pandemic levels [10] - The end of QT has resulted in a reduction of approximately $2.3 trillion from the Fed's portfolio of Treasurys and mortgage-backed securities [8][10] Market Reactions - Markets had anticipated the end of QT either in October or by year-end, with major averages experiencing volatility but reaching record highs, particularly in Big Tech stocks [11][12] - Historical trends indicate that markets tend to rise following Fed rate cuts, although this could lead to higher inflation risks [12]