The Federal Reserve has said it will halt its effort to shrink its balance sheet in December as it cut interest rates by a quarter point, in a bid to ease borrowing conditions amid concerns about the US labour market.
The central bank’s decision to call time on its three-year quantitative tightening (QT) programme comes after concerns that QT has disrupted short-term lending markets and threatened to push up banks’ funding costs.
But the Fed also signalled that further rate cuts this year were not a foregone conclusion, and Wednesday’s decision also divided the 12-member Federal Open Market Committee (FOMC).
Kansas City Fed president Jeffrey Schmid called for rates to remain on hold, while Trump ally and Fed governor Stephen Miran backed a deeper half-point cut.
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“There were strongly differing views about how to proceed in December,” Fed chairman Jerome Powell said after the meeting, adding that expectations of a cut at the next meeting in December were far from a foregone conclusion.
Stocks fell sharply on Mr Powell’s comments, with the S&P 500 down 0.3 per cent. Rate-sensitive two-year treasury yields climbed to 3.57 per cent, up 0.08 percentage points.
The FOMC said in a statement that the New York Fed would begin reinvesting all the proceeds of maturing treasury debt held by the central bank into the government debt market from December 1st.
The Fed will also reinvest $35 billion a month from maturing mortgage-backed securities into the treasuries market from December 1st
Mr Powell said there had been “a more significant tightening” in money market conditions over the past three weeks. “We’re shrinking the balance sheet at a very slow pace ... There’s not a lot of benefit to shrinking it by the last few dollars.”
The move to cut the benchmark rate to between 3.75 and 4 per cent, which was widely expected, leaves it at its lowest level since late 2022.
The FOMC said the downside risks to employment “rose in recent months”. Amazon, UPS, Target, General Motors and other US companies have announced thousands of job cuts in recent days.
“Conditions in the labour market seem to be gradually cooling,” Mr Powell said.
Wednesday’s cut, the second in a row, also comes after a campaign waged by President Donald Trump to push the Fed to dramatically lower borrowing costs.
The Fed bought trillions of dollars of treasuries after the Covid-19 pandemic, increasing its balance sheet to $9 trillion and flooding the financial system with cash.
Since 2022, the central bank has pulled back, allowing treasuries and government mortgage-backed securities to mature without buying replacements.
The Fed meeting came almost one month into a federal government shutdown, which has left the central bank without some economic data it relies on to make its decisions.
“This rate cut was the easy part,” said Eswar Prasad at Cornell University. “The Fed could soon be flying blind, rendering it bereft of the data markers that typically guide its policy decisions and therefore exposing it even more to political pressures.”
Mr Powell said that the shutdown would weigh on economic activity, “but these effects should reverse” after it ends. – Copyright The Financial Times Limited 2025
