FOMC Lowers Rates at the October 2025 Meeting

The Federal Open Market Committee [FOMC] met this week to discuss economic developments and adjust the course of monetary policy. Committee members voted to reduce the Fed Funds Rate at this meeting and shared the data that informed their decision.

FOMC Lowers Interest Rates

The FOMC voted to reduce the Fed Funds Rate by 0.25 percentage points to a target range of 3.75 – 4.00%. This change followed an equally sized reduction at the September meeting, and it marked the first time since 2022 that the lower end of the target range has been below 4%.

In addition to the interest rate decision, the committee announced an end date of December 1^st for their ongoing quantitative tightening program. The Fed has been reducing holdings of Treasury and mortgage-backed securities since June 2022 and slowed the pace of those reductions in March of this year. Now, they will conclude the effort to reduce the size of the balance sheet.

In the press conference following the interest rate announcement, Chair Powell indicated that the Fed will continue to allow mortgage-backed securities to “roll off” the balance sheet next year. The proceeds of these investments will be reinvested in Treasury securities to move the balance sheet toward the Fed’s preferred duration and composition.

The Data Behind the Decision: Inflation, GDP, Unemployment

The FOMC entered the meeting with limited information due to the government shutdown preventing the release of official data. However, they were still able to form opinions about the economy based on available information and decide the future of interest rates.

As usual, the FOMC reviewed a variety of economic factors before making their decision. These included the inflation rate, economic growth, and the trajectory of the labor market.

Inflation Below Expectations

One report that was released despite the lapse in funding was the Consumer Price Index [CPI] for September. This report showed that prices rose by 0.3% for the month and 3.0% for the year – both of which were below analyst expectations.

The inflation rate remains well above the Fed’s 2% target, and it has increased since tariffs were introduced earlier this year. Chair Powell has presented two opposing paths for inflation going forward. First, his “base case” scenario involves a one-time increase in the base level of prices due to tariffs. Second, he has stated that tariffs could cause more widespread inflation over a longer period. He said that the Fed will continue their work to prevent the latter scenario in the press conference following the announcement.

Moderate Economic Growth

The most recent update to Gross Domestic Product [GDP] was released on September 25^th, about a week after the September FOMC meeting. It showed that GDP rose by 3.8% in the second quarter, an upward revision of 0.5 percentage points from the previous estimate.

Chair Powell described economic activity as expanding at a “moderate pace” in the first half of the year, though it has slowed from the same time the previous year. He also noted that the government shutdown will have an adverse effect on economic activity, but that should moderate quickly after funding resumes.

Unemployment Data Unavailable Prior to FOMC Meeting

The government shutdown delayed new unemployment data for the month of September. Without this data, the FOMC had to rely on trends from previous reports and private data to assess the labor market.

The most recent official data available to the committee was from August, and it showed that the unemployment rate was 4.3%. Chair Powell described job gains as slowing and noted lower participation in the labor market as well as softening labor demand. These factors led him to conclude that downside risks to the labor market have risen in recent months.

Expectations for the Future of Interest Rates

The FOMC released economic projections in September which showed an approximately 0.5 percentage point decline in the Fed Funds Rate by the end of the year, including the recent reduction. Chair Powell said multiple times in the press conference that the balance of risks has shifted, and a rate cut in December is not a foregone conclusion. He also noted considerable differences in forecasts and opinions of committee members about further rate cuts this year.

In 2026, the FOMC’s September projections showed that rates will fall by an additional 0.2 percentage points. If the committee reaches consensus and reduces rates as projected, historical patterns show that they would most likely do so in 0.25 percentage point increments. This would mean one quarter-point cut in December, and one next year.

Prior to Chair Powell’s press conference, Fed Funds futures markets forecasted a December rate cut with about 90% confidence. This confidence dwindled to below 70% after Powell’s press conference. Market forecasts for 2026 are widely distributed but generally suggest that an additional rate cut next year is likely given the current information.

The economic situation is continuously evolving, and the Fed has stated that it will continue to make decisions based on incoming data. It is wise for business leaders to follow this data as well to inform their expectations for interest rates, once the government shutdown concludes and data is once again available.

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