The 25 Basis Point Pivot
Liquidity is the only metric that matters today. The Federal Reserve reduced the federal funds rate by 25 basis points on October 29, 2025, lowering the target range to 3.75 to 4.00 percent. This move confirms a definitive shift from the restrictive policy maintained throughout 2024. The decision was not unanimous, reflecting a growing divide within the FOMC regarding the persistence of service-sector inflation versus a cooling labor market. Per the official FOMC October statement, the committee cited a ‘balanced’ risk profile, but the data suggests a deeper concern for the 4.3 percent unemployment rate recorded in the previous month.
Quantitative Tightening Reaches the Terminus
The headline rate cut is secondary to the technical shift in the balance sheet. The Federal Reserve announced the complete cessation of its Quantitative Tightening (QT) program, effective October 31, 2025. Since June 2024, the Fed had been allowing up to $25 billion in Treasury securities and $35 billion in mortgage-backed securities (MBS) to roll off monthly. That drain on systemic liquidity has ended. By halting the runoff, the Fed is essentially providing a floor for bank reserves, which currently sit at $3.2 trillion. This prevents a repeat of the September 2019 repo market spike, a scenario that became a high-probability risk as the Overnight Reverse Repo (ON RRP) facility dwindled to near-zero levels this week.
The Yield Curve Reacts
Fixed income markets anticipated this move. Immediately following the 2:00 PM ET announcement, yields on the 10-Year Treasury note compressed to 3.82 percent, while the 2-Year Treasury yield fell to 3.78 percent. This maintains a slight positive slope in the 10Y-2Y spread, ending the longest inversion in U.S. financial history. The market is pricing in a ‘soft landing,’ but the velocity of the rate cuts since early 2025 suggests the Fed is chasing a cooling economy rather than leading it. Real interest rates remain positive, but the margin of safety for highly leveraged corporate balance sheets has widened significantly.
Labor Market Discrepancies
The Fed’s dual mandate is now leaning heavily toward the maximum employment pillar. While inflation, as measured by the core PCE deflator, has hovered at 2.5 percent for three consecutive months, the hiring data shows cracks. According to the Bureau of Labor Statistics September jobs report, the economy added only 112,000 jobs, falling short of the 150,000 required to keep pace with population growth. Furthermore, the ‘quits rate’ has dropped to 2.1 percent, a level typically associated with economic stagnation. This lack of labor churn reduces wage-push inflation but signals a decline in consumer confidence that could weigh on 2026 GDP forecasts.
| Economic Indicator | October 2024 | October 2025 | YoY Change |
|---|---|---|---|
| Fed Funds Rate | 5.33% (Effective) | 4.00% (Target) | -133 bps |
| CPI (YoY) | 3.1% | 2.3% | -80 bps |
| Unemployment Rate | 3.9% | 4.3% | +40 bps |
| S&P 500 P/E Ratio | 21.4x | 23.8x | +11.2% |
Technical Transmission Mechanisms
The end of QT changes the plumbing of the financial system. For the past 18 months, the Treasury Department has been forced to issue a higher proportion of T-bills to fund the deficit, absorbing liquidity that might otherwise have gone into risk assets. With the Fed no longer shrinking its portfolio, the private sector will not have to absorb as much duration. This effectively lowers the term premium on longer-dated bonds. For mortgage lenders, the halt in MBS runoff is a reprieve. The spread between the 30-year fixed mortgage and the 10-year Treasury has narrowed by 15 basis points in the last 48 hours, currently sitting at 245 basis points. This move is intended to unlock the ‘frozen’ housing market where homeowners have been reluctant to trade in 3 percent mortgages for 7 percent rates.
The Real Estate Squeeze
Commercial Real Estate (CRE) remains the primary systemic risk. With $800 billion in CRE debt maturing in the next 14 months, the 25 basis point cut offers marginal relief. However, the pivot to an easing cycle allows banks to begin restructuring non-performing loans without realizing catastrophic losses immediately. The Fed’s decision to stop QT ensures that the liquidity required for these restructurings remains in the banking system. If reserves were to drop below the ‘ample’ threshold, regional banks would face a liquidity trap, unable to lend while simultaneously managing their maturing CRE portfolios.
Focus shifts now to the December 17 FOMC meeting. The market is pricing in a 62 percent probability of another 25 basis point cut. The critical data point to watch is the November non-farm payrolls report. If hiring falls below the 100,000 threshold, the Fed may be forced to consider a larger 50 basis point cut to start 2026. The terminal rate for this cycle is now projected by many analysts to be 3.25 percent, a level expected to be reached by mid-2026.
