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Market Commentary

“Foggy Roads and Policy Potholes”

The Federal Reserve delivered its second consecutive rate cut, trimming the federal funds rate by 25 basis points to a range of 3.75%–4.00% at the October meeting. Powell framed the move as a risk-management step rather than a signal of aggressive easing, citing softer labor conditions and still-elevated inflation. Importantly, he stressed that a December cut is “not a foregone conclusion,” a phrase that sent markets scrambling to recalibrate expectations. Treasury yields jumped and equities wavered as traders realized the Fed is not on autopilot. In short, the Fed is inching toward neutral territory but keeping its options open—because when you’re driving in the fog, you don’t hit the gas.

Balance sheet policy also took center stage, with Powell announcing the end of Quantitative Tightening (QT) on December 1. The Fed’s balance sheet is now roughly $2.2 trillion smaller than its peak, and now stands at $6.1 trillion. The Fed will stop letting US Treasuries roll off and now allow the MBS that pays down to be reinvested into US T-Bills, shifting the SOMA portfolio toward a more traditional composition. This pivot is designed to stabilize reserve levels and reduce funding stress, which had begun to surface in recent weeks. Powell emphasized that these changes were anticipated and align with long-term goals, but the timing underscores the Fed’s desire to maintain liquidity as uncertainty lingers. Think of it as the Fed swapping out its old workout routine for something less strenuous—still healthy, just less intense.

On the economic front, Powell painted a picture of moderate expansion, supported by resilient consumer spending, even as the government shutdown drags on and clouds visibility. Analysts estimate the shutdown is shaving about 0.2% off GDP per week, though Powell expects activity to rebound once Washington reopens. Meanwhile, inflation remains a mixed bag: goods prices are rising thanks to tariffs, housing services inflation is cooling, and services ex-housing are moving sideways. Strip out tariff effects, and core PCE sits near 2.3%–2.4%, which Powell calls “pretty good.” Of course, consumers don’t care about tariff-adjusted math—they just see higher prices and wonder why their grocery bill feels like a luxury item.

The labor market story is equally nuanced. Powell highlighted two forces at play: a drop in labor supply, partly due to lower immigration, and softer demand for workers. Despite headlines about layoffs, aggregate data like job openings and initial claims remain stable, suggesting no sharp deterioration yet. Powell doesn’t see weakness accelerating, but he acknowledged stress among lower-income consumers and certain sectors. In other words, the job market isn’t falling off a cliff, but it’s definitely not climbing any mountains either.

Adding a geopolitical twist, recent headlines about a tariff truce with China offer a glimmer of hope for easing goods inflation. While details remain fluid, any reduction in tariff pressure could help Powell’s narrative that underlying inflation is near target. Still, the Fed isn’t banking on diplomacy to do its job—policy remains data-dependent, and Powell’s tone suggests caution will dominate until the fog clears. Combine that with the prolonged shutdown, and you have a central bank navigating uncertainty with one eye on inflation and the other on employment risks.

Markets, for their part, are learning to live with ambiguity. Stocks faded and Treasury yields climbed after Powell downplayed the odds of a December cut, reminding investors that monetary policy is more debate club than autopilot. Futures still price in some chance of easing, but the bar is higher now, and incoming private labor data will be critical. For now, Powell’s message is clear: the Fed is well-positioned to respond, but don’t expect a straight line to lower rates. If you’re looking for certainty, astrology might be your best bet.

Figure 1: System Open Market Account (Fed’s Holdings.)
Source: Federal Reserve, Bloomberg, as of Oct 31, 2025