The Federal Reserve is at a critical juncture transitioning from "preemptive rate cuts" to a "wait-and-see" approach, with short-term policy path uncertainty expected to increase. Following the October FOMC meeting, market expectations for a December rate cut have notably declined—from 82.4% pre-meeting to 63.8%. The December decision will remain data-dependent, with key focuses on whether post-government-shutdown employment data shows significant improvement and whether tariff-induced inflationary pressures exceed expectations.

On October 30, 2025, the Fed cut rates by 25 bps to 3.75%-4.00%, but the decision was made under heightened complexity due to missing key data, including the September nonfarm payroll report, amid the U.S. government shutdown. This reinforces the Fed’s preemptive easing stance, particularly as U.S. stocks hit record highs and financial conditions remain accommodative. The move resembles "driving in fog"—a hedge against potential labor market downturns.

Available private-sector data, such as low initial jobless claims and stable job openings, suggest no immediate labor market collapse, though ADP data indicates slowing hiring. Meanwhile, September CPI moderation did not deter the cut, allowing the Fed to proceed.

Internal divisions within the Fed have widened, signaling caution ahead. Two dissenting votes emerged: Governor Stephen Milan favored a 50 bps cut, while Kansas City Fed President Schmid advocated a pause. Chair Powell later struck a hawkish tone, stating a December cut is "far from certain" and emphasizing no "preset path," reflecting growing prudence.

With the policy rate now at 4%, just four cuts away from the neutral 3% rate, further easing may become less urgent if inflation risks persist or the labor market stabilizes.

BOCOM INTL notes that the government shutdown is likely to end by mid-November, allowing the Fed to assess November employment and inflation data—a critical window for policy direction. Easing U.S.-China trade tensions may also mitigate tariff-driven inflation.

The Fed announced it will halt balance sheet runoff (QT) by December 1, as liquidity tightens: overnight reverse repo balances decline, the Standing Repo Facility usage rises, bank reserves shrink, and the effective federal funds rate climbs relative to reserve balances. Since June 2022, QT has reduced the Fed’s balance sheet by $2.2 trillion (now ~21% of GDP vs. peak 35%). Post-QT, the Fed will reinvest MBS proceeds into short-term Treasuries to align its portfolio duration with market benchmarks.

Looking ahead, the U.S. dollar shows signs of rebounding, likely strengthening further post-Powell’s hawkish remarks. With equities at record highs and leverage ratios climbing, market volatility risks may rise, potentially impacting metals and emerging-market assets.