UBS Economics-US Economic Perspectives _FOMC Lower rates and an end to QT...-118548161

ab29 October 2025Global ResearchUS Economic PerspectivesFOMC: Lower rates and an end to QTFOMC cuts for the second time this year; Powell says third not a done dealThe FOMC voted 10 to 2 to lower the target range for the federal funds rate by 0.25 pp to 3.75% to 4.00% in its second 25 bp rate cut this year. Governor Stephen Miran dissented in favor of a 50 bp reduction, as he did in September, and FRB of Kansas City President Schmid dissented in favor of no action, something we thought he might do last meeting as well. In the press conference Chair Powell described a range of views among participants about the outlook and warned "a further reduction in the policy rate at the December meeting is not a foregone conclusion." Policy is not on a preset course, he reiterated. We expect another 25 bp rate cut at the December FOMC meeting. While the September labor market data might look ok, we expect softer news to emerge in the October and November data usually released in November and December, but that may be delayed due to the government shutdown. We think that the downside risks to the labor market will present themselves again, and have not been dispelled relative to the concerns in September.Today, the FOMC also announced the end of balance sheet runoff, which we expected. Starting December 1, the System Open Market Account holdings that would otherwise be running off will be fully reinvested. Outright SOMA expansion will come, said Chair Powell, though no instructions on timing where given. The FOMC instructed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to conduct open market operations as needed to keep the federal funds rate within the target range. Then, on December 1, the current $5 billion monthly cap on Treasury runoff is being pushed to zero, and the desk was instructed to roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities to securities being auctioned, one option we noted in our preview. Also beginning on December 1, the desk was directed to reinvest all principal payments from the Federal Reserve's holdings of agency securities into Treasury bills. We assumed the FOMC would want a bill heavy component, since, compared to outstanding debt, bill ownership is low and they deem bill purchases as having a light market footprint. We also explained in our preview that the FOMC would want to avoid taking down net duration outright, to avoid as much as possible the perception that these actions are monetary policy easing, as opposed to something technical or administrative in nature.After the initial step where the balance sheet will remain steady, we would expect balance sheet expansion to resume at the start of 2026. Today, Chair Powell said that would be the following step, and as we suspected and wrote in our preview we expect that expansion to come largely with bill purchases. Chair Powell hinted at that today. "So we'll be adding reserves at a certain