“Between Tariffs and a Softer Labor Market”: My Analysis of the Oct 29, 2025 FOMC Press Conference
“Between Tariffs and a Softer Labor Market”: My Analysis of the Oct 29, 2025 FOMC Press Conference
Executive summary
On October 29, 2025, the Federal Reserve cut the federal funds rate by 25 bps to 3.75%–4.00% and—equally important—announced that balance-sheet runoff (QT) will cease on December 1. Chair Jerome Powell emphasized a balanced-risk approach: near-term inflation risks are tilted up (mainly from tariffs), while employment risks are tilted down as hiring cools. He stressed that another cut in December is “far from” a foregone conclusion, reflecting strongly differing views on the FOMC, including two dissents (one for a larger cut; one for no cut). Money-market frictions and higher use of the Standing Repo Facility (SRF) helped motivate the QT stop. In the shutdown-induced “data drought,” the Fed is relying more heavily on timely private indicators until official series resume. (Board of Governors of the Federal Reserve System, 2025a; Schneider, 2025; Derby, 2025). Federal Reserve+2Reuters+2
1) What the Fed did—and why it matters
Decision. The FOMC lowered the target range to 3.75%–4.00% and signaled that QT will stop on Dec 1, after more than three years of shrinkage that reduced securities holdings by roughly $2+ trillion from the peak. The Fed will continue letting agency MBS run off and reinvest those proceeds into Treasury bills, gradually shortening duration and moving toward a Treasury-dominant portfolio. These balance-sheet details aim to stabilize reserves and reduce funding-market strains without adding duration risk to the system (Board of Governors of the Federal Reserve System, 2025a; Derby, 2025; Bloomberg, 2025). Federal Reserve+2Reuters+2
Framing. Powell underscored the Fed’s dual mandate and the “two-sided risks” after a period when the inflation side dominated. He called current policy “modestly restrictive” and positioned the cut as a move “toward neutral” as risks to employment have risen. (Schneider, 2025). Reuters
2) State of the economy: growth firmer, hiring cooler
Activity. Real GDP momentum looks firmer than expected into 2H25 after a weak Q1 and a brisk Q2 bounce; nowcasts show moderate growth while acknowledging tariff- and trade-related noise. The government shutdown has delayed some official releases, complicating near-term reads (Reuters; BEA schedules). Powell flagged consumer spending resilience and ongoing capex in equipment and intangibles, consistent with Q2 revisions that highlighted AI-related investment. (Reuters; AP, 2025). Reuters+1
Labor market. Through August, the unemployment rate hovered near 4.3% while job creation slowed markedly. High-frequency indicators (e.g., state UI claims, vacancy data) point to gradual cooling rather than a sharp deterioration. Powell noted that immigration and participation trends have reduced labor-supply growth, amplifying the slowdown in hiring. (Schneider, 2025). Reuters
3) Inflation: tariffs lift goods prices; services disinflation grinds on
Where inflation stands. With official PCE data delayed by the shutdown, Powell referenced CPI-based estimates implying headline and core PCE ~2.8% y/y for September—higher than earlier in the year as goods inflation re-accelerated. Tariff pass-through is visible across categories (e.g., apparel, appliances), even as services disinflation—especially shelter—continues. Market and survey expectations beyond the near term remain near 2%. (Mutikani, 2025; Reuters live coverage; BEA calendar).
One-off vs persistent. The Fed’s “base case” treats tariff effects as a one-time level shift that fades unless it spills over via expectations or a re-tightening labor market—classic channels documented in the literature on tariff pass-through and inflation psychology (Amiti, Redding, & Weinstein, 2019). Powell explicitly flagged vigilance on those risks. (Schneider, 2025). Reuters
Cross-checks in the data drought. In the absence of some government series, the Fed is tracking private real-time gauges: Adobe’s Digital Price Index (online prices) and State Street’s PriceStats (daily inflation) both offer timely signals; recent updates show uneven but contained inflation pressure. (Adobe, 2025; State Street, 2025). Adobe for Business+1
4) Money markets and the QT stop: what changed?
The Fed will freeze the size of its balance sheet on Dec 1 because signs of tightening reserve conditions have emerged: repo rates have firmed relative to administered rates, there’s been more use of the SRF, and the effective fed funds ratehas drifted higher within the target range. Put simply, reserves are approaching the “ample” threshold, and squeezing them further would risk instability. The Fed will still allow agency MBS to mature and reinvest into T-bills, nudging the portfolio toward shorter duration and a composition closer to the Treasury market. (Derby, 2025; Bloomberg, 2025). Reuters+1
5) “Toward neutral”: where is r* today?
Powell hinted that the policy rate is moving closer to neutral—a level that cannot be directly observed. Academic and policymaker estimates (e.g., Holston-Laubach-Williams) suggest r* has drifted higher post-pandemic relative to the 2010s, though with wide uncertainty bands. That helps explain why policy can remain modestly restrictive even after cumulative cuts. (New York Fed r* resources; Reuters). Bloomberg
6) December is not pre-decided
Powell was unusually explicit: “A further reduction…is not a foregone conclusion—far from it.” The committee is split: at this meeting one dissenter sought a larger cut (Governor Miran), while another opposed any cut (KC Fed’s Schmid). The path to December will hinge on what limited data can reveal about:
Labor: any re-acceleration vs continued cooling;
Inflation: whether tariff-related goods pressure broadens into services;
Financial conditions: the impact of QT cessation on funding markets and risk appetite. (Schneider, 2025; Reuters currency and markets wraps). Reuters+2Reuters+2
7) The AI-capex question—and rates
Powell downplayed the interest-sensitivity of AI/data-center capex, arguing that multi-year productivity bets are driven more by expected returns than by a few dozen basis points of financing costs. Empirically, investment sensitivity to rates varies by sector and the share of intangible capital (Caggese & Pérez-Orive, 2022). That heterogeneity helps reconcile strong AI-related investment with a softer overall labor market. (Schneider, 2025). Reuters
8) Transmission beyond U.S. borders (why you should care in Asia)
Policy spillovers are immediate. The HKMA cut its base rate by 25 bps within hours—standard under Hong Kong’s currency board. Several Gulf central banks followed. These moves flow through to funding costs, FX, and asset pricesregionally, with implications for property markets and cross-border capital—issues Asian investors track closely. (Reuters, 2025). Reuters
9) What to watch next (practical checklist)
High-frequency labor: state UI claims; online vacancies.
Inflation cross-checks: Adobe DPI, PriceStats, and market breakevens for hint of tariff spillovers. (Adobe, 2025; State Street, 2025). Adobe for Business+1
Money-market plumbing: SRF take-up, SOFR-repo spreads as QT halts. (Derby, 2025). Reuters
Global follow-through: Asia and Middle East policy moves, USD path. (Reuters, 2025). Reuters
Bottom line
The Fed executed a measured pivot: a small rate cut and a pause in QT to preserve reserve “ampleness,” while refusingto pre-commit to a December cut. In a world of tariff-tilted inflation and slow-bleed labor cooling, the operating theme is optionality. For investors and policy-makers alike, the data drought raises the premium on cross-checking private, high-frequency indicators against official releases as they return. (Board of Governors of the Federal Reserve System, 2025a; Schneider, 2025). Federal Reserve+1
Markets move on tariffs, rates and data.
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References (APA)
Adobe. (2025). Digital Price Index. https://business.adobe.com/resources/digital-price-index.html Adobe for Business
Amiti, M., Redding, S. J., & Weinstein, D. E. (2019). The impact of the 2018 tariffs on prices and welfare. American Economic Review: Papers & Proceedings, 109, 571–575. https://doi.org/10.1257/pandp.20191031
Bloomberg News. (2025, Oct 29). Fed cuts rates quarter point, sets end to balance-sheet runoff. Bloomberg
Board of Governors of the Federal Reserve System. (2025a, Oct 29). FOMC statement.https://www.federalreserve.gov/monetarypolicy/2025-10-29.htm Federal Reserve
Board of Governors of the Federal Reserve System. (2025b, Oct 29). Implementation note.https://www.federalreserve.gov/monetarypolicy/fomcproj.htm Federal Reserve
Caggese, A., & Pérez-Orive, A. (2022). Monetary policy and corporate intangible investment. Journal of Financial Economics, 145(3), 1031–1053. https://doi.org/10.1016/j.jfineco.2021.12.017
Derby, M. S. (2025, Oct 29). Market liquidity concerns cloud Fed’s end to balance-sheet drawdown. Reuters. Reuters
Holston, K., Laubach, T., & Williams, J. C. (2017). Measuring the natural rate of interest. Journal of International Economics, 108, S59–S75. (See NY Fed’s r* resources.)
Hong Kong Monetary Authority cuts base rate by 25 bps, tracking Fed. (2025, Oct 30). Reuters. Reuters
Mutikani, L. (2025, Oct 24). U.S. inflation eases a touch in September; tariff effects visible in goods. Reuters.
New York Fed. (2025). R-star (natural rate) resources and FAQs. https://www.newyorkfed.org/research/policy/rstar
Schneider, H. (2025, Oct 29). Fed lowers rates but suggests move may be last of 2025; policy split grows amid data gaps. Reuters. Reuters
State Street Global Markets. (2025, Oct). PriceStats: Inflation persists through the fall.https://www.statestreet.com/us/en/insights/us-inflation-pricestats State Street
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