Monetary Policy Shifts Towards Fine-Tuning: Divergence Among Major Central Banks Becomes Pronounced

On October 30, the Governing Council of the European Central Bank (ECB) decided to keep the deposit facility rate unchanged at 2.00%, with the main refinancing operations rate and the marginal lending facility rate held at 2.15% and 2.40%, respectively. This marks the third consecutive meeting where rates have been left unchanged. The ECB noted that current inflation is close to its medium-term target of 2%, and its assessment of the inflation outlook remains broadly unchanged. Despite a challenging global environment, the euro area economy continues to grow, supported by a strong labour market, robust private sector balance sheets, and previous interest rate cuts, which underpin its resilience.

On the same day, the US Federal Open Market Committee (FOMC) announced a 25 basis point cut to the target range for the federal funds rate, bringing it to 3.75%–4.00%. This constitutes the second consecutive rate cut, aligning with market expectations. The decision was supported by a majority of members but revealed rare dissent: Kansas City Fed President Jeffrey R. Schmid opposed the cut, advocating for holding rates steady, while Governor Stephen A. Milan argued the cut was insufficient, favoring a 50 basis point reduction instead.

The FOMC stated in its release that economic activity is "expanding at a moderate pace," job gains have "decelerated significantly," and the unemployment rate has "edged up." Inflation, which has "increased since the start of the year, remains elevated." The Committee emphasized that increased downside risks to employment in recent months were a primary rationale for this rate cut.

Furthermore, the Federal Reserve announced that it will conclude its balance sheet runoff operation, effective December 1, 2025. From that point onward, principal payments from agency mortgage-backed securities (MBS) will be fully reinvested in short-term US Treasury securities. This move marks the formal end of the quantitative tightening (QT) program that lasted over three years. Over the past three and a half years, the Fed's securities holdings have been reduced by a cumulative $2.2 trillion, lowering the balance sheet's share of nominal GDP from 35% to about 21%.

During the press conference, Fed Chair Jerome Powell stated that a follow-up rate cut in December is "not a done deal, far from it," noting clear divisions within the Committee regarding the next steps. He also acknowledged that the partial federal government shutdown, which has delayed the release of key economic data (such as the September non-farm payrolls report), would impair the quality of decision-making for the December meeting.