The Fed’s Deep Divide — Evening Brief – 10.31.25
The government shutdown has created an unprecedented challenge for the Federal Reserve, depriving policymakers of the economic data they rely on to gauge the state of growth, employment, and inflation. The Congressional Budget Office (CBO) estimates that the month-long closure could reduce fourth-quarter GDP growth by up to two percentage points, with roughly $7 billion–$14 billion in output permanently lost.
That lack of visibility has left Fed officials effectively flying blind as they approach the December 2025 policy meeting, making it harder to justify another rate cut—or rule one out. Liquidity indicators are also flashing yellow: bank reserves are declining, repo facility usage is rising, and the Secured Overnight Financing Rate (SOFR) has been creeping higher, signaling mounting pressure in short-term funding markets. Meanwhile, long-term yields are climbing again—the 10-year Treasury, which hovered near 4% through October, has edged up to 4.10%, reflecting renewed market skepticism over near-term easing.
The critical variable in the days and weeks ahead will be how the Treasury market responds. Is the latest spike in yields a temporary adjustment or the start of a sustained climb driven by fiscal and inflation concerns? If the latter, the Fed could face fresh pressure to pause its rate-cut trajectory, forcing policymakers to weigh market discipline against their easing ambitions.
“The rationale for cutting rates currently is to help prop up the weakest sectors in the economy, and at the same time do this in a very measured fashion as to not rekindle the tapped-down inflation that many consumers have recently enjoyed,” said James Cordier, Founder of OptionSpreaders.com, in an interview with Connect Money. “It won’t be easy, nor will it possess a great deal of certainty, but the Fed has apparently decided it’s worth the risk.”
Markets have sharply reduced the odds of another cut following Fed Chair Jay Powell’s remarks at the October press conference. “A rate cut in December is not a foregone conclusion—far from it,” Powell said, acknowledging “strongly differing views” among FOMC participants. Futures markets now imply less than a 50% probability of a move.
That divide runs deep within the Fed’s leadership. Governor Christopher Waller supported the quarter-point cut in October but said he will “wait to see how data evolve” before endorsing another. New York Fed President John Williams signaled openness to more cuts later this year if labor-market conditions weaken further, while Vice Chair for Supervision Michael Barr and Dallas Fed President Lorie Logan have both urged caution, stressing that inflation remains elevated and policy must remain data dependent.
On the other side of the spectrum, Governor Stephen I. Miran, who joined the Board in September, dissented in favor of a larger half-point cut, arguing that policy remains overly restrictive. Kansas City Fed President Jeffrey R. Schmid voted against any cut at all, preferring to hold rates steady given ongoing inflation risks.
Powell, for his part, has positioned himself at the center of the debate—emphasizing flexibility but warning that December’s decision will depend on data still delayed by the shutdown.
As the central bank’s final meeting of the year approaches, one thing is clear: the Fed is no longer moving in lockstep. For markets and investors, that means a bumpier path ahead, where each meeting delivers not just a policy move, but a fresh argument over what the Fed’s “next step” truly signals for 2026 and beyond.