Fed delivers second cut
As expected, the Federal Reserve lowered interest rates by 0.25% to a target range of 3.75%-4%, following through on the rate-cutting cycle it kicked off last month:
Source (data): Federal Reserve. Values represent upper end of Fed funds target range. (For illustrative purposes. Not a recommendation.)
However, there were two dissents, one in favor of a larger (0.5%) cut, and one in favor of no cut. Also, in his post-announcement press conference, Fed Chair Jerome Powell said a December rate cut was "not a foregone conclusion," words that were followed by a downturn in stocks, although the S&P 500 rebounded to end the day unchanged.
The Fed had been on hold for several months prior to September because of concerns about potential tariff-driven inflation, but a string of soft employment data convinced the committee that a weakening labor market posed a bigger risk to the economy, and that lower rates were called for.
While inflation has remained above the Fed’s 2% target, the relatively moderate Consumer Price Index (CPI) reading on October 24 suggested it hadn’t turned sharply higher. This jibed with observations by Ellen Zentner, Chief Economic Strategist for Morgan Stanley Wealth Management, who noted that the private data that has been available during the government shutdown indicates a “trend of general [economic] moderation, with little sign the labor market is falling off a cliff or inflation is surging.”1
The Fed will likely retain an “easing bias,” but may be more difficult for it to communicate about potential actions after year-end without an end to the government shutdown.
Morgan Stanley & Co. analysts expect the Fed to retain an “easing bias,” suggesting more rate cuts are in the pipeline. However, they also believe it may be challenging for the central bank to communicate about their possible course of action after year-end without an end to the government shutdown and a resumption of economic data releases.2
Morgan Stanley & Co. analysts’ baseline forecast is for the Fed to cut rates by 0.25% at its next two meetings (in December and January), then pause to assess incoming economic data. The analysts expect the fed funds rate to reach its “terminal” target range of 2.75%-3% by July 2026.3
Note: The Fed’s next policy meeting is scheduled for December 9-10.
1 MorganStanley.com. Ellen Zentner Macro Update. 10/10/25.
2 MorganStanley.com. October FOMC Preview: 25bp Rate Cut and Prepare for the End of QT. 10/27/25.
3 MorganStanley.com. Faster cuts. 9/12/25.