The Federal Reserve (Fed) once again cut its benchmark interest rate by 25 basis points in October, as expected, lowering the federal funds rate to a range of 3.75% to 4%.¹ This marks a second consecutive rate cut following the Fed’s decision to slash rates in September.

As was the case last month, the Fed views the recent interest rate cuts as insurance to help stabilize a weak labor market. During its meeting, the committee judged “that downside risks to employment rose in recent months,”² which likely supported the decision.

Of course, monitoring the status of the labor market has become more of a challenge recently with the government remaining closed and official labor market statistics being delayed. That said, Chair Jerome Powell mentioned in his press conference that the public and private sector data available shows that the employment picture has remained similar to September. Powell also mentioned that despite a relatively weak labor market, data prior to the government shutdown showed that “growth in economic activity may be on a somewhat firmer trajectory than expected,” in part driven by stronger consumer spending.

With respect to the inflation side of its dual mandate, the Fed acknowledged that inflation remains above its 2% target and that the gap is primarily being driven by tariff-related goods prices. Powell reiterated that the Fed’s base case is that tariffs are a one-off increase in the price level and that they do not become of a source of persistent inflation. Powell mentioned that in contrast to the rise in goods prices, disinflation in the services category continues – a much larger portion of the inflation basket and the area where the Fed would become more concerned about persistently higher prices.

Despite the shutdown, the release of the slightly delayed Consumer Price (CPI) Index last week – which was published due to its necessity for the Social Security Cost of Living Adjustment (COLA) in 2026 – likely helped the Fed in making its decision as the report showed that services inflation remained contained in September.

What did our strategists learn from the October Federal Open Market Committee (FOMC) announcement?

As our strategists anticipated, the Fed is continuing its approach to stem weakness in the labor market despite some concerns that inflation remains above the 2% target. The Fed’s view that tariffs are likely to be a one-off increase in prices aligns with how our strategists view ongoing inflation dynamics. So long as services inflation remains tame, the Fed should be able to prioritize any further weakness in the labor market.

However, what our strategists found interesting was that there were two dissents on the committee; one member wanted to cut rates by 50 basis points and one member thought it prudent to keep rates unchanged.³ This outcome likely means that the interest rate decision for December remains open for debate and will greatly depend on the incoming labor market and inflation data. Looking further ahead, our strategists still expect the possibility of two more interest rate cuts over the course of next year.

Another noteworthy observation from October’s proceedings was the Fed’s decision to end “quantitative tightening”⁴ in December after a long cycle of shrinking its balance sheet dating back to 2022. The Fed employs this technique to help mitigate the money supply during times of higher inflation. This move should ease pressure in short-term funding markets and our strategists do not see changes to the balance sheet as having a material impact on J.P. Morgan’s outlook in the near-term.

How did markets react to the October interest rate cuts?

Markets were pricing in the strong probability of another rate cut, so movement was relatively limited. However, momentum was stalled by Powell’s statement that a December rate cut “was not a foregone conclusion.”⁵

Immediately following that update, the S&P 500 fell 0.3%, while the Nasdaq held steady. The Dow Jones Industrial Average also dropped roughly 0.3% after having gained when the rate cut news was initially released.⁶ Notably, 2-year and 10-year U.S. Treasury yields rose roughly 10 basis points (0.1%) each as market participants shifted their expected path for interest rates to incorporate slightly less Fed cuts.⁷

Overall, equity markets didn’t react too adversely, but activity should nonetheless be monitored as the Federal Reserve ponders an additional cut this year.

What does the Fed’s announcement mean for investors?

While another cut in December is not guaranteed, our strategists continue to see further interest rate cuts in 2026. Investors should feel empowered to continue running their rate-cut playbook over the coming quarters.

That could mean:

• Locking in higher yields: As the Fed cuts rates yet again, yields on cash-like holdings, including savings accounts, certificates of deposit (CDs) and money market funds, will likely continue to decline. Our strategists favor highly rated corporate bonds and municipal bonds in this environment.
• Positioning for equity upside: U.S. stocks historically perform well during non-recessionary Fed cutting cycles, especially when the economy remains resilient.
• Adding portfolio protection: To guard against risks like higher-than-expected inflation or market volatility, consider assets such as gold (a hedge against inflation) and derivatives that can be structured to provide downside protection, while also maintaining exposure to possible market upside.

As always, consult a J.P. Morgan advisor to learn how these developments could affect your investing portfolio.

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