December Rate Cut – Not a Foregone Conclusion

Paresh Upadhyaya SVP, Director Fixed Income and Currency Strategies

Executive Summary

The Federal Reserve (the Fed) delivered its anticipated 25 basis point rate reduction, lowering the Fed Funds rate to 3.75-4.00% and marking the second consecutive rate cut. This was a well-communicated rate cut from various Fed Governors, most notably from the recent speech by Chair Powell. The Fed struck a more hawkish tone than expected as Chair Powell stated a rate cut at the December meeting was not a foregone conclusion. This was evident at Chair Powell’s press conference. The Fed also announced its intention to end balance sheet runoff known as Quantitative Tightening (QT) on December 1. 

• The Fed Funds rate was eased by 25bp to 3.75-4.00%, in line with expectations
• There were meaningful changes to the FOMC Statement
• The Fed announced its intention to end QT on December 1
• In the press conference, Chair Powell stated December rate cut is not a done deal

FOMC Statement – Meaningful Changes to the Statement 

There were a few important edits to the Federal Open Market Committee (FOMC) statement. There was an upgrade to the Fed’s characterization to its current growth outlook, which is an acknowledgement to the stronger than expected growth numbers in Q2 and initial indications of another robust growth for Q3. There was a slight tweak in the description of the labor market from “downside risks to employment have risen to rose,” affirming that the labor market is cooling. The most significant change in the statement came in the third paragraph where the Fed announced its intention to end QT on December 1. They stated that the Fed will reinvest all principal payments from all its holdings of agency securities into Treasury bills. Not surprisingly, there was one dovish dissenter with Stephen Miran advocating for a 50 basis point rate cut and there was a hawkish dissenter with Jeffrey Schmid preferring no change to the target range for the Fed Funds rate at this meeting. 

Fed Ends QT on December 1

As we expected, the Fed ended a three-year phase of QT. Early this month, Chair Powell telegraphed the Fed would terminate QT in the “coming months”. Under QT, the Fed allowed the bonds it accumulated during Quantitative Easing (QE) to roll off its balance sheet as they mature without replacing them. This has allowed the Fed’s balance sheet to shrink from a peak of nearly $9 trillion in April 2022 to $6.6 trillion as of October 2025. The Fed had begun to incrementally wean itself off of QT as it slowed the pace of QT in April 2025. The Fed decided to end QT as the rolling off of bonds reduce liquidity from the banking system which leads to lenders parking fewer reserves at the Fed, leaving funding costs at risk to rise. Fed officials agreed to end QT once the banking system showed signs of moving from an “abundant” level of liquidity to “ample” – a level where banks can meet their funding requirements at a price in line with the Fed funds rate, but where they are no longer flush with excess cash. The recent spike in repo rates–or the interest rate at which a country's central bank lends money to commercial banks, typically in exchange for government securities–suggests liquidity has started to tighten and that we may be at or near an ample level of reserves. Chair Powell did say the Fed may need to grow the balance sheet at some point in the future because liquidity needs to increase over time in proportion to the economy. Overall, Chair Powell reminds us that ending QT does not have direct monetary policy implications but largely impacts the level of liquidity in markets. 

Press Conference – Monetary policy is approaching neutral

In the press conference, Chair Powell maintained a slightly more hawkish biased tone than expected. He spent much time discussing that the December rate cut is not a foregone conclusion and added that it’s “far from it”. He said the Fed is not on a preset course. It is clear the prospects for a December rate cut are now higher for a few reasons. First, the FOMC appears divided with the emergence of a hawkish dissenter. This highlights that there could be more members in favor of keeping rates on hold in December, as there were four dots from the September dot plot favoring only one cut between the October and December meetings. Second, with the Fed Funds rate now in the 3-4% range, monetary policy is now in neutral territory, fostering a growing belief among board members to adopt a wait-and-see approach. Third, with the government shutdown and the lack of data, the Fed needs to take a more cautious approach and not make any hasty decisions. Finally, Chair Powell seemed at ease on inflation, citing that non-tariff inflation is closer to their 2% target and the labor market has not deteriorated further. 

Market reaction and investment implications

Market Reaction: Financial markets sold off

Financial markets sold off as expectations for a December rate cut receded. Market expectations for a December rate cut fell from 90% on October 28 to 66% on October 29. Yields rose across the board with the 2-year, 10-year and 30-year yield rising 8 basis points, 5 basis points and 3 basis points, respectively, leading to a flattening in the 2-10s and 2-30s yield curves of 3 basis points and 6 basis points, respectively. The USD appreciated modestly with the DXY index rising 0.5% as of 4pm on October 29. As the market digests Chair Powell’s comments, there are risks of further volatility in the coming days. 

Investment Implications

The FOMC Statement and especially Chair Powell’s press conference made it clear the Fed believes monetary policy is now at neutral. In addition, the current economic environment, an employment market that has not deteriorated further from September and non-tariff inflation close to the Fed’s target, give the Fed justification to keep rates on hold at the December meeting barring any surprises to employment or inflation. More Fed purchases of Treasury bills could lead the US Treasury to increase issuance towards the front end of the yield curve, so this could exert some downward pressure on long term yields. As such, we continue to position portfolios around themes of shorter interest rate duration, higher credit quality and sector exposures where spreads can compensate for elevated macroeconomic uncertainty and tighter market liquidity. 

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