The Federal Reserve lowered its benchmark rate on October 29, 2025, to 3.75 %–4.0 %, the lowest level in three years, but cautioned that a further cut in December is not a done deal. The quarter-point reduction was approved amidst two dissenting votes: one pushed for a larger half-point cut, while the other argued for leaving rates unchanged. The Fed had a difficult task given that it was going into the policy decision without an entire month of government employment data.
The Fed emphasized that it would not be relying on a fixed script but will move only after seeing more persuasive data. The Fed’s concerns about inflation have taken a back seat to worries about a weakening labor market in recent months.
Inflation, for its part, has not rebounded into alarm territory yet but neither has it receded as fast as expected. The Fed expects some inflation uplifts from new tariffs, but the magnitude and timing are uncertain. In September 2025, the consumer price index increased 3% from a year earlier and was lower than expected. The core CPI, excluding food and energy costs, also increased annually by 3%. Since inflation came in lower than what the market had expected, it was near certain that the Fed would cut rates. The report showed that on annual basis, food prices increased by 3.1%, energy by 2.8%, and shelter by 3.6%. The Fed expects some further increases in inflation as tariffs work through the supply chains and finally reach the consumers.
For households waiting on lower borrowing costs whether for mortgages, auto loans or credit cards, the Fed’s message suggests patience may be needed. Market participants slashed the odds of a December cut from around 90 % to just 56 % in the hours after his remarks. The Fed is facing two opposing economic signals where there are upside risks to inflation and downside risks to the labor market. For businesses and consumers, that means expectations of cheaper funding must be tempered by the possibility of delay.
Today’s quarter-point rate reduction came as no surprise to markets as had been expected for weeks and was already reflected in mortgage pricing. According to Freddie Mac, average mortgage rates have slipped in recent months, touching a one-year low of 6.19% last week. Rates began easing well before the Fed’s announcement, signaling that investors had anticipated the move. Whether they continue to fall from here will hinge on how upcoming economic data and policy developments unfold.
