The Federal Reserve’s latest policy meeting has confirmed what markets had begun to suspect: America’s central bank is nearing the limits of its ability to fine-tune an increasingly fragile economy.
By cutting its benchmark rate by a quarter of a percentage point to a range of 3.75–4.00% AND announcing that quantitative tightening will end on December 1st, the Fed may have completed its last rate reduction of 2025. The move, though modest, has exposed growing fractures within the institution and revived fears of a return to stagflation.
The decision by the Federal Open Market Committee (FOMC) passed by ten votes to two, underscoring a sharp divergence among policymakers. Stephen Miran, a Trump-appointed governor, pushed for a deeper 50-basis-point cut, while Jeffrey Schmid of the Kansas City Fed dissented in favour of holding rates steady. The consensus that had defined the earlier part of the year has splintered, and with it, the sense of clear direction from the central bank.
Why this matters for the US economy?
The split reflects a deeper uncertainty about what now ails the US economy. Inflation, though off its 2022 highs, remains stubbornly above the Fed’s 2% target. The labour market, long a pillar of resilience, is beginning to sag under the weight of slowing demand. Job creation has weakened, wage growth is easing, and surveys suggest a steady erosion in business and consumer confidence.
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The combination of persistent price pressures and softening employment data fits uncomfortably with the classic symptoms of stagflation, a scenario in which growth stalls while inflation refuses to fade.
Complicating matters further, the government shutdown has disrupted the release of key data, including payroll, retail, and inflation reports. Bereft of reliable information, the Fed has been forced to rely on partial indicators and market proxies to gauge the economy’s health. Without clear data, policymakers risk misjudging the balance between inflation control and economic support. In such an environment, the safest course may be to pause.
Focus on financial stability
The decision to halt quantitative tightening is revealing. It suggests that the Fed’s immediate priority is to preserve financial stability rather than to deliver further stimulus. The liquidity squeeze in funding markets had begun to tighten reserves, raising the risk of disorder. Ending QT, therefore, is less about promoting growth and more about preventing strain in the financial system. The move stabilises short-term funding but leaves the broader question of inflation unresolved.
The result is a central bank caught between conflicting imperatives. Cutting too aggressively risks reigniting inflation; tightening too far could deepen a slowdown. With policy divided and data incomplete, the Fed’s ability to steer confidently has diminished. Markets, once fixated on the timing of future cuts, are now adjusting to the likelihood that there will be no more this year.
The implications extend beyond America
The Fed’s balance sheet sets the tone for global liquidity, and its decision to stop shrinking that balance sheet will ripple through capital markets worldwide. Other central banks are likely to follow the Fed’s cautious tone, if not its exact actions, as they navigate their own inflation dilemmas.
For investors, the message is sobering. The era of coordinated central-bank policy has given way to one of discord and constraint. Inflation is proving sticky, employment is weakening, and monetary policy has lost its sense of direction.
The Fed may not have triggered stagflation yet, but the conditions for it are forming, and that, for markets, marks the beginning of a more volatile and uncertain phase in the global economic cycle.
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