Fed cuts rates by quarter point and signals end to quantitative tightening

Central bank to halt balance sheet reduction in December as FOMC members split on monetary policy path

Washington

The Federal Reserve yesterday announced it would halt its three-year quantitative tightening programme in December as it delivered a quarter percentage point rate cut, leaving borrowing costs at their lowest level since late 2022.

The decision to end the balance sheet reduction effort comes after concerns that QT has disrupted short-term lending markets and risked pushing up banks' funding costs. The central bank's holdings peaked at $9tn following pandemic-era purchases.

But the rate decision exposed deep divisions within the Federal Open Market Committee. Kansas City Fed president Jeffrey Schmid advocated keeping rates on hold, while Fed governor Stephen Miran, a Trump ally, pushed for a deeper half-point reduction.

"There were strongly differing views about how to proceed in December," Fed chair Jay Powell told reporters after the meeting, adding that a cut at next month's gathering was "not a foregone conclusion".

Markets reacted negatively to the remarks. The S&P 500 fell 0.3 per cent, while rate-sensitive two-year Treasury yields climbed 8 basis points to 3.57 per cent.

Balance sheet operations

The FOMC said the New York Fed would begin reinvesting all proceeds from maturing Treasury debt held by the central bank into the government debt market from December 1.

The Fed will also reinvest $35bn monthly from maturing mortgage-backed securities into Treasuries from the same date, reversing a policy that has drained roughly $2tn from the financial system since 2022.

The central bank began its QT programme after accumulating trillions of dollars in Treasuries during the pandemic, expanding its balance sheet to $9tn and flooding the financial system with liquidity. Since 2022, it has allowed securities to mature without purchasing replacements.

Labour market concerns

The move to cut the benchmark rate to 3.75-4 per cent, which was widely expected by markets, came as the FOMC noted that downside risks to employment "rose in recent months".

Amazon, UPS, Target, General Motors and other large US employers have announced job cuts in recent days, adding to evidence of cooling labour market conditions.

"Conditions in the labour market seem to be gradually cooling," Powell said, though he stopped short of signalling alarm about employment prospects.

Yesterday's cut, the second consecutive quarter-point reduction, follows sustained pressure from President Donald Trump for the Fed to lower borrowing costs more aggressively. The president has repeatedly criticised Powell's leadership and called for dramatic rate reductions.

Data challenges

The Fed's meeting came almost a month into a federal government shutdown that has left the central bank without access to some economic data it typically relies on for policy decisions.

The impaired data flow adds uncertainty to the Fed's deliberations as it attempts to balance cooling inflation against emerging labour market weakness, complicating assessments of the appropriate policy stance.

The divisions within the committee and Powell's cautious rhetoric suggest the central bank may pause its easing cycle to assess incoming data, particularly as it navigates the twin challenges of limited government statistics and political pressure from the White House.

Market pricing of future rate moves shifted following Powell's comments, with traders paring bets on additional cuts in the first quarter of next year.