The Fed cuts rates — and quietly flips the liquidity switch
The Federal Reserve met this week for its second-to-last time of the year and delivered a 25-basis-point rate cut, bringing the benchmark range down to 3.75%–4.00%, as expected, marking only the second cut of the year. Inflation and a labor market on the rocks gave them cover here. September’s delayed CPI report came in softer than expected at 3%, with housing costs cooling to their weakest pace in years. Jobs data, which has been absent during the government shutdown, has been approximated by alternative sources — and it seems just as soft as previously assumed. That combination has allowed Powell to pivot away from “higher for longer” and focus on market stability instead.
But while markets had priced in this cut as a foregone conclusion at 99.9% probability, the real headline here is subtler.
The bigger shift is on the Fed’s balance sheet. Powell all but confirmed the central bank is preparing to end its three-year stretch of quantitative tightening, the process of shrinking its $7 trillion pile of Treasurys and mortgage-backed securities. Since 2022, the Fed has let more than $2 trillion in assets roll off, draining cash from the banking system. Now, warning lights are flashing: repo rates have spiked above policy benchmarks, banks are tapping emergency Fed facilities more often, and funding conditions are starting to look…2019-ish. This obscure-sounding maneuver is actually the plumbing of the financial system. When liquidity gets this tight, rates and reserves stop behaving as intended. Ending QT would quietly inject stability — and signal the Fed thinks it’s pulled enough money out of the system for now. As the FT put it, officials are trying to avoid “shifting from abundant to merely ample” liquidity — bureaucratic-speak for don’t break the system by accident.
The politics around the situation add complexities to the narrative. Trump officials have been pushing Powell to cut faster while railing against the Fed’s bond holdings. Treasury Secretary Scott Bessent has even been grilling potential future Fed chairs on whether they’d rein in the central bank’s “mission creep” into debt management.
Overall, though, the throughline here remains the same: the inflation fight is cooling, the liquidity fight is heating up. The rate cut was expected — the end of QT is the real pivot.
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