10/31/25: Fed Cuts Rates as Government Shutdown Continues

The US Government shutdown has continued into its 31^st day as pressure on Congress mounts to reach an agreement. The current shutdown is poised to exceed the 35-day impasse that occurred in 2018-19, which holds the record. The Federal Open Market Committee (FOMC) met this week and despite the lack of government employment data, they opted to cut the federal funds target rate by 25 basis points to a target range of 3.75 – 4.00%. Fed Chair Powell referenced the weakening labor market despite some inflationary pressures and moderate economic growth. In addition, the FOMC announced that they would end the runoff of US Treasury and Agency Mortgage-Backed Securities (MBS), known as quantitative tightening or QT, on December 1 to ease pressure on the funding markets. The NY Fed plans to replace MBS paydowns with purchases of US Treasury Bills. The Fed’s balance sheet has shrunk to approximately $6.6 trillion from a high of nearly $9 trillion in 2022. There were two dissents to the rate decision, one from Stephen Miran in favor of a 50-basis point cut and the second from Jeffrey Schmid who preferred to leave rates unchanged. Prior to Wednesday’s rate reduction, the fed funds futures markets had been pricing in another quarter point cut at the December 10 FOMC meeting. Following the split dissents reflecting a more divided Committee and Fed Chair Powell’s hawkish-leaning presser, US Treasury yields moved higher as the market tempered its expectations for another rate cut this year. As of this writing, the fed fund futures market is pricing in about a 60% chance of another quarter point ease in 2025.

Meanwhile, the Conference Board’s Consumer Price Index fell to 94.6 as of mid-October from an upwardly revised 95.6 for the prior month. The Present Situation Index, which measures consumers’ views of current business and labor conditions, improved by 1.8 points to 129.3, while the Expectations Index fell by almost 3 points to 71.5. Readings of below 80 are indicative of a risk of recession. The ongoing government shutdown was listed as a key concern for many of the survey participants. The S&P Cotality Case Shiller 20-City Home Price Index decelerated to 1.6% growth year-over-year for August, the slowest pace since July 2023. New York and Chicago led the gains in home prices with increases of about 6%, while Tampa saw a 3.3% drop over the last year.

Longer-term interest rates have moved higher this week, with the 2-year US Treasury trading at 3.60%, the 5-year yield at 3.71%, and the 10-year sitting at 4.09%. Chandler is expecting at least two additional rate cuts from the FOMC over the next 6 months; however the Fed has indicated that they will remain data dependent. 

Next week (US Government data may be delayed by shutdown): Institute for Supply Management (ISM) Manufacturing, S&P Global US Manufacturing Purchasing Managers Index (PMI), S&P Global US Services PMI, ISM Services, Wards Total Vehicle Sales, Job Openings and Labor Turnover Survey (JOLTS), MBA Mortgage Applications, ADP Employment Change, US Employment Report, University of Michigan Sentiment. 

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