Economy Matters

A divided Federal Open Market Committee (FOMC) voted October 29 for the second interest rate cut of 2025 and halted the post-Covid-19 pandemic program that has reduced the Federal Reserve's balance sheet.

Atlanta Fed president Raphael Bostic said he was able to support the reduction, even though he's been on record most of this year as favoring one rate cut as the appropriate way to meet the Fed's dual mandate of promoting maximum employment and stable prices. Bostic spoke October 31 in a fireside chat with Cleveland Fed president Beth Hammack, moderated by Brian Cheung of NBC News, at a banking and finance conference  hosted at the Dallas Fed by the Federal Reserve Banks of Dallas, Atlanta, and Cleveland.

"There's weakness in the employment side, but we have not been at target for almost five years on the inflation side," Bostic said. "Figuring out which one is the most significant, I think, is important. I was able to get behind it because I still think we're in restrictive territory and that, to me, is the most important thing. We can't really forget that inflation is a significant problem, and we have to get that back down to our 2 percent target. I think we can still do it, but with each step we get closer and closer to neutral in ways that make me uncomfortable."

The FOMC voted 10-2 to reduce its short-term fed funds rate by a quarter point, to a range of 3-3/4 to 4 percent. The two dissenting votes were cast by Governor Stephen Miran, who called for the same half-point cut he called for at the FOMC's previous meeting, and by Kansas City Reserve Bank president Jeffrey Schmid, who preferred the target rate to remain unchanged.

At his press conference following the meeting, Fed chair Jerome Powell said the vote was "a strong, solid vote in favor of this cut. The strongly differing views are really about the future, what does that look like." Powell said participants reported noticing "stronger economic activity," even as the labor market is, "I don't want to say stable, but it's not clearly in motion, it's not clearly declining quickly in any case. It may be just continuing to gradually cool.'

In reducing the short-term interest rate, the Committee gave more weight to concerns about indications of a weakening labor market than to sticky inflation. Lower interest rates tend to stimulate the economy and enhance employment, while elevated interest rates tend to curb inflation. The FOMC's decision was informed by data available while the federal government has been shuttered, beginning October 1, Powell said. Powell compared making monetary policy with limited information to "driving in the fog," which he said means slowing down, a point Bostic said resonated with him. "I think it really describes for me an approach, a philosophical approach to doing policy, which is when there's so much uncertainty, there's so little clarity, it's preferable to go slower," Bostic said. "Take your time, don't rush."

The FOMC statement observed that the risk to employment has been rising through August, at the same time inflation has moved up since earlier this year and remains somewhat elevated above the Fed's 2 percent target:

• "Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up but remained low through August; more recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated.
• "The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment rose in recent months."

The Fed's short-term rate influences interest rates on credit cards, car and business loans, and, to some degree, mortgage rates.

The Fed's vote to end quantitative tightening (QT) culminates a discussion of the program's longevity that has appeared in the FOMC'S minutes throughout the year. The Committee voted unanimously  in 2022 to take a methodical approach to reducing the balance sheet,  which had risen from $4.2 trillion before the pandemic to an historic high of $8.96 trillion in April 2022. (It now stands at $6.6 trillion.) Powell said that, after the balance is frozen on December 1, the Fed will take steps to manage the composition and amount of securities held by the Fed.

The balance accrued as a result of the Fed's role in the federal government's effort to mitigate the negative economic effects of the Covid-19 pandemic. The December 1 termination of QT arrives a few months earlier than expected by some participants in the New York Fed's Survey of Market Expectations, who told the Fed over the summer they expected the program would end in February 2026.

Bostic said he's comfortable with ending QT and expects the FOMC will begin discussions soon about managing the balance sheet so reserves are able to accommodate swings in demand. Bostic said he's on "team abundant" in terms of the amount of reserves. "The thing I do worry about is the facility may have a certain capacity it can serve, and we may get an outsized, unexpected shift or two, or three things move at the same time, and we find we are not positioned to handle that," Bostic said.

Bostic does not currently cast a vote on monetary policy matters because of the rotation schedule for voting by presidents of Federal Reserve Banks, though he provides information about the southeastern economy and participates in the FOMC's assessment of the economy and policy options.

The FOMC's final meeting of 2025 is scheduled for December 9–10. Powell said the Committee has not decided whether to cut the interest rate at that time, as some Fed observers have speculated. "A further reduction in the policy rate at the December meeting is not a forgone conclusion—far from it," Powell said. "Policy is not on a preset course." The FOMC is slated to release a Summary of Economic Projections, which is published quarterly (the latest edition  came out September 17) and contains the participants' projections on the most likely outcome for economic indicators including real gross domestic product growth, unemployment rate, and inflation through 2028 and beyond.

Read the Federal Reserve's FOMC statement,  issued October 29.

Watch Fed chairman Jerome Powell's October 29 press conference,  or read the transcript.

Read Bostic's September 3 quarterly essay, Focusing on Fundamentals Amid Great Complexity.

Read or watch Bostic's July 3 presentation to the Institute for Monetary and Financial Stability, in Frankfurt, Germany, "The Dual Mandate and the Primacy of Inflation Expectations."

David Pendered

Staff writer for Economy Matters