In a move that surprised exactly no one paying attention, the Federal Reserve delivered its second consecutive rate cut in October 2025, slicing another 25 basis points and dragging the federal funds range down to 3.75%–4.00%. That's the lowest it's been since 2022, and the market responded like a kid on Christmas morning. Equity indexes surged toward record highs, with investors betting that cheaper money means higher stock prices. Simple math, really—lower discount rates juice up future earnings valuations.
The Fed's October cut to 3.75%–4.00% sent markets soaring as investors celebrated the return of cheaper money.
The easing cycle is officially underway, fueled by cooling inflation and a labor market that's starting to look a little soft around the edges. Recent jobs reports show hiring is slowing down, and both CPI and PCE metrics have been decelerating. Translation: the Fed finally has room to breathe without worrying inflation will come roaring back. FOMC made it clear they're watching employment data like hawks now, balancing their dual mandate between price stability and maximum employment.
Market watchers are betting hard on more cuts. The probability of a December rate cut jumped from 40% to 79% in just weeks. That's not a gentle shift—that's a stampede. Sectors like IT, pharmaceuticals, housing, and defensives are seeing the most action as investors chase yield wherever they can find it. Foreign portfolio investment is picking up too, though it's still modest compared to the equity rally.
Not everyone at the Fed is thrilled, though. Two of twelve FOMC voters dissented on the October cut, signaling some internal tension about the pace and size of easing. The central bank is also slowing its balance sheet reduction, hinting that quantitative tightening might be nearing its end. Forward guidance remains vague—classic Fed—because they're staying data dependent and refusing to lock themselves into any specific future moves. The Fed's communication strategies about future policy paths are particularly important now, as traders parse every word from officials to anticipate the trajectory of rates through 2026.
Lower rates mean cheaper borrowing for businesses and consumers, which should goose corporate investment and housing demand. High-yield savings accounts are still paying out, but those rates are trending down. The easing story isn't just domestic either—other major central banks are cutting too, adding global pressure to the Fed's decision-making calculus. These rate decisions also have ripple effects beyond equities, with currency values fluctuating as forex traders reposition based on shifting interest rate differentials between major economies. Understanding how interest rates influence exchange rates has become critical for investors with international exposure, as the dollar's strength ebbs and flows with each Fed policy adjustment.
