The US Federal Reserve cut its benchmark interest rate by 25 basis points ( early Thursday Hong Kong time ), lowering the federal funds rate to 3.75-4.00% in a widely anticipated move.

The decision, announced at the conclusion of its October 28-29 meeting, marks the second consecutive reduction following September’s 25bp cut, signalling a cautious easing cycle despite persistent inflation above target and a government shutdown delaying critical jobs data.

Job gains have slowed this year, and the unemployment rate has edged up but remained low through August; more recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated, according to a statement.

The ongoing federal government shutdown, now one of the longest in US history, has also complicated the Fed’s job. Collection of important economic data has been indefinitely halted as employees at the Bureau of Labor Statistics ( BLS ) are furloughed during the shutdown.

Markets had priced in the cut with near-certainty. “Markets are very close to fully pricing in two additional 25-basis-point cuts by year-end, with Tradeweb data showing a 94% probability of a 25-basis-point cut at Wednesday’s meeting and 98% by December,” said Bhas Nalabothula, head of US institutional rates at Tradeweb, in a pre-meeting commentary.

Tradeweb’s probabilities moderated into 2026, with only 53% odds for a January cut and 48% by March, reflecting investor views of a deliberate Fed pace as “inflation progress remains uneven”.

Inflation level anticipated

The cut comes against a backdrop of cooling but sticky inflation. September's Consumer Price Index showed headline inflation at 3.0% year-on-year – slightly below expectations – and core inflation at 3.1%, still exceeding the Fed's 2% goal.

Yet, as Nigel Green, chief executive officer of deVere Group, emphasized prior to the meeting, “the inflation data was anticipated, and it’s no longer the deciding factor. The Fed’s attention has turned squarely to the labour market. Jobs data will move the needle on rate cuts.”

A prolonged government shutdown, however, suspended Bureau of Labor Statistics operations, delaying the October jobs report originally due November 1. The prior August data revealed that just 22,000 jobs were added and unemployment was at 4.3%, the highest since 2021.

“The labour market is the Fed’s most important compass right now,” Green notes. “Without it, policymakers will have to make one of the year’s biggest decisions without their clearest guide to economic health.” This “creates a dangerous blind spot”, forcing reliance on private indicators like ADP estimates and amplifying market volatility, he adds.

Despite the uncertainty, the Fed proceeded, tolerating inflation near 3% to safeguard the employment momentum. “The Fed can tolerate inflation around 3%,” Green observes. “What it cannot risk is a rise in unemployment that damages confidence and spending.”

Traders now see the federal funds rate falling to 3.75-4.0% by year-end, according to the CME FedWatch Tool. “The pace of rate cuts will slow, not stop,” he notes.

Boost to emerging markets  

Globally, the easing cycle bolsters emerging markets and China. UBS economists project a 50bp cut in December and a weaker US dollar at 7.10 yuan by year-end.

“Historically, lower US rates and a weaker dollar have benefited EM and Chinese equities, with MSCI China averaging 11% returns in the six months after previous initial rate cuts,” says James Wang, head of China equity strategy research at UBS.

Offshore listings ( American depositary receipts, H-shares ) and TMT sectors such as data centres, internet, and semiconductors outperformed, while cyclicals lagged. Wang favours AI-themed A-share TMT, brokers, high-dividend names, and anti-involution plays in solar, chemicals, and lithium.

The cut reinforces UBS's overweight on EM and constructive China view, citing a 30% valuation discount to MSCI World. With data gaps persisting, markets brace for heightened sensitivity ahead of any delayed jobs release.