Monthly Interest Rate Update
At the end of October, the Federal Reserve cut interest rates by 25 basis points to a target range of 3.75%–4.00%, citing slower job growth and increased risks to the labor market. Despite a modest rise in inflation to 3.0%, the Fed also announced it will end quantitative tightening on December 1. Chair Jay Powell downplayed expectations for another rate cut this year, prompting Treasury yields to rise and futures markets to scale back bets on a December move. Meanwhile, the record-long government shutdown has disrupted key economic data, leaving policymakers and investors operating with limited visibility. Still, AI-driven investment, resilient consumer spending, and strong financial markets continue to support growth, likely limiting the scope for further rate cuts in 2025.
As expected, the Fed cut rates by 25 bp at the end of October. Citing slowing job gains and a “shift in the balance of risks” toward a softening labor market, the FOMC moved the Fed funds target rate to a range of 3.75% to 4.00%. This was the second cut of the year, and it comes despite a slight uptick in CPI inflation to 3.0%. The release of September inflation data was delayed by two weeks due to the Federal government shutdown. Bureau of Labor Statistics staff were temporarily called back to work to produce the report, but not to collect new October price data, so there will be at least a one-month gap in reporting CPI this year.
The committee also decided to end its balance sheet reduction (“quantitative tightening”) effective December 1. This action may have a small downward impact on longer term Treasury yields. Notably, there were two dissents from the committee decision: one voter (Stephen Miran) wanted a 50 bp cut, and the other (Jeffrey Schmid) advocated for no cut.
Fed chair Jay Powell tamped down expectations of any further cuts this year. Prior to the October 29 FOMC meeting, futures markets were pricing in a 99% chance of an October cut and 94% chance of another quarter-point in December. During the post-announcement press conference, Powell tried to quell such definitive December expectations, saying, “A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it.” To make it abundantly clear, he repeated the last line.
In the wake of the press conference, Treasury yields and swap rates jumped 10 bp across the curve, with 10-year yields moving above 4%. Futures traders also reduced their bets on a December cut, with the chance of a reduction falling from 94% to 64%. From the emphasis the Fed chair put on the uncertainty, and the visible disagreement on the direction of rates at the FOMC, Powell has tried to give the committee flexibility to work out its differences based on the incoming data without being pushed into a corner by the market. A December cut is still more likely than not but no longer seems like a foregone conclusion.
Of course, “incoming data” has been rather sketchy since the Federal government shutdown. At 36 days, this is now the longest shutdown in US history, preventing the collection and release of data on job creation, unemployment, inflation, construction, factory orders, international trade, housing starts, durable goods orders, retail sales, GDP and a host of agricultural and industrial benchmarks. Market economists have been able to use estimates and proxies to monitor the health of the US economy so far, but investors and policymakers are flying in a thickening fog, increasing the potential for unpleasant surprises. More tangibly, the shutdown has prompted the FAA to cut flight capacity by 10% at 40 high-volume markets, 1.2 million Federal employees are furloughed or working without pay, and 42 million will see delays and reductions in SNAP benefits. Adding pressure to 22 million consumers at the lower half of the income distribution, health insurance premiums in the ACA marketplace are projected to rise 114% in 2026 unless Congress renews expiring household subsidies.
Still, the overall economy seems to be holding up well despite pockets of contraction. An AI fueled investment surge, continued consumer spending at the upper end of the income distribution, and strong stock and bond markets are buoying the broader economy and supporting hiring. This is likely to prevent the Fed from aggressively cutting short term rates and should put a floor under long term rates through year-end.
Key Statistics: Interest Rates, Unemployment and Inflation
| Year-end 2021 | Year-end 2022 | Year-end 2023 | Year-end 2024 | October 31, 2025 | |
|---|---|---|---|---|---|
| 10-yr Treasury yield | 1.51% | 3.87% | 3.88% | 4.57% | 4.08% |
| 2-yr Treasury yield | 0.73% | 4.43% | 4.25% | 4.24% | 3.57% |
| Spread | 0.78% | -0.56% |
-0.37% | 0.33% | 0.51% |
| Fed Funds Target (mid) | 0.125% | 4.375% |
5.375% | 4.375% | 3.875% |
| CME Term SOFR 1-mo | 0.055% | 4.36% | 5.35% | 4.33% | 4.00% |
| CPI (y/y change) | 7.0% | 6.5% | 3.1% | 2.7% | 3.0% |
| Core PCE (monthly) | 4.1% | 4.7% | 3.16% | 2.81% | 2.91% |
| 5-yr TIPS (market breakeven) | 2.91% | 2.38% | 2.15% | 2.39% | 2.40% |
| U-3 Unemployment | 3.9% | 3.5% | 3.7% | 4.2% | 4.3%* |
| Real avg weekly earnings | 4.7% | -3.1% | 0.5% | 1.0% | 1.4%* |
| Annual change in NFP jobs | +6,451,000 | +4,503,000 | +2,560,000 | +1,450,000 |
+1,229,000* |
* Most recent data. Current releases delayed by government shutdown.
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The Fed funds futures curve shifted upward about 15 bp in the week after the FOMC meeting as market expectations for a December cut moved from near certainty to 64% probability.
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This reduced expectation carried through into the outlook for the next five years.
Labor market still softening – as far as we can tell
Source: Indeed.com, Bureau of Labor Statistics
- In the absence of government JOLTS data (Job Openings and Labor Turnover), analysts have looked for private sector proxies.
- Above is the Indeed job opening index mapped against JOLT openings. The job vacancy rate is now at its lowest since the pandemic.
- The most recent construction data from the Census Department showed a continued surge in data center construction, with manufacturing and other sectors declining in the past 9-12 months.
ACA premiums to surge without premium credits
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Health insurance premiums in the ACA marketplace are a key sticking point in the Federal shutdown.
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Without an extension of premium subsidies, healthcare researcher KFF anticipates insurance premiums will jump 114% on average for enrollees.
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All rates shown are indications only and subject to change.
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