The Breakdown - Fed Cuts as Expected, But Powell Keeps Markets Guessing

Episode Date: October 31, 2025

Markets got the rate cut they expected — but not the clarity they wanted. Fed Chair Jerome Powell stunned investors by signaling that December’s cut is “far from a foregone conclusion,” while also announcing an end to quantitative tightening. With two dissents on the committee and growing confusion over data gaps from the government shutdown, Powell’s cautious tone left markets guessing. Stocks whipsawed, Bitcoin fell, and questions mounted about liquidity risk and the so-called “AI bubble.” Today on The Breakdown, NLW unpacks a Fed day that left everyone wondering what comes next. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/@TheBreakdownBW Subscribe to the newsletter: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://blockworks.co/newsletter/thebreakdown⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownBW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, October 30th, and today we are talking about Fed Day. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, well, yesterday was FedD. and while we got the rate cut we were expecting, there was a sense of uncertainty on where policy

goes next. During his opening remarks, Chairman Jerome Powell said, A further reduction in the policy rate at the December meeting is not a foregone conclusion far from it. Now, heading into the meeting, a rate cut was fully priced in for both this month and December, with a January cut also more likely than not. When Powell said those words, the odds of a cut in December dipped to just 66%, and January dropped to just 25%. In other words, this was a big change in direction, significantly rattling market expectations. Powell was questioned about this statement as soon as questions from the press began. Implying a lot of disagreement among the committee, Powell said, we had strongly differing views today. The takeaway is that we haven't made a decision

about December and we're going to be looking at the data that we have. Paul acknowledged that he always said the Fed is data dependent and doesn't make decisions in advance, but said, I'm saying something in addition here, that it's not to be seen as a foregone conclusion, in fact, far from it. It turned out that the disagreement on the FOMC was enough to drive two dissents, one from each end of the spectrum. On the Dover side, Governor Stephen Moran voted for a double cut instead. Moran was placed on the Fed board earlier this year and is seen as a proxy for Trump's views that the Fed should be cutting rapidly, so this isn't that much of a surprise. On the hawkish side, Kansas City Fed President Jeff Schmidt voted to hold rates steady,

believing that it's already time for a pause. Powell commented, For some part of the committee, it's time to maybe take a step back and see whether there are really downside risks to the labor market or see whether, in fact, the stronger growth that we're seeing is real. Looking at the economic situation, Powell noted that risks are still alive for both inflation and the labor market, commenting, there is no risk-free path for policy. The view on inflation was that tariffs are still having an impact, but that the underlying level of inflation is only slightly above the 2% target. Regarding the labor market, Powell suggested that it's in balance,

if, in his words, a rather curious balance. Hiring has slowed down, initial unemployment claims are basically flat, and the unemployment rate is historically low at 4.3%. In Powell's view, the labor market, quote, isn't clearly declining quickly. It may be just continuing to gradually cool. There was a lot of confusion about the actual state of the economy, given the lack of data due to the government shutdown. Powell said that the Fed was still making use of privately collected data and could gather a fairly complete picture, especially on the labor market, but without the usual government data, it's a little hard to know for sure. Powell said, if there were a significant or material change in the economy one way or another, I think we'd pick that up.

Growth was the standout factor with Powell noting that it, quote, may be on a somewhat firmer trajectory than expected. Legacy internet and infrastructure are brittle, plagued by downtime, coverage gaps, and outdated financing models. Communities and builders are left behind while capital sits locked out. Althea is changing that. Since 2018, their technology has powered resilient, sustainable networks across the U.S. and abroad.

With Althea L1, they built the world's first blockchain purpose built for utilities and telecom, turning infrastructure into a transparent, investable asset class. Through liquid infrastructure, networks can now be financed in real time, operated more efficiently, and scaled to meet the $3 trillion telecom and utilities market. This is fintech for infrastructure, connecting capital directly to builders and returning revenue seamlessly to funders. No middlemen, no bottlenecks, just sovereign, resilient infrastructure that works for people, communities, and investors alike. Learn more at althea.net and find them on Crackin to join the future.

of infrastructure finance. In addition to the rate cut, Powell announced the end of qualitative tightening or balance sheet runoff. As of the beginning of December, the Fed will hold their balance sheet steady and stop allowing bonds to roll off. Powell said, our long-stated plan has been to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions. Signs have clearly emerged that we have reached that standard. He pointed to repo rates moving up, pressure on the repo markets around key dates, and the effective federal funds rate creeping up. Powell argued, these developments are what we expected to see as the size of our balance sheet

declined and warrant today's decision to cease runoff. These are all signs that liquidity and funding markets is starting to get tight, while the Fed is clearly aware of liquidity issues starting to rear their ugly head, at this stage they view them as a normal and expected change in the market structure. This seems like a fairly big bet to be making. It would be going too far to say that there's any real sign that a liquidity crisis is coming in the short term, but the Fed chose to delay the end of QT by a month, presumably because they're confident there won't be a problem in the short term. Arguably more than inflation or unemployment, the real risk at the moment is liquidity conditions. And for a Fed that is talking about insurance cuts and erring on the side of caution when

it comes to interest rates, it seems kind of like an unnecessary risk. It could also be that the Fed doesn't want to spook the market, so wanted to give plenty of notice before they ended QT. The notion of insurance cuts came up during the media question and Powell gave some interesting insight on where the committee is with that. He noted that revisions to job numbers over the summer had demanded that the Fed should move closer to neutral, given that inflation is no longer the largest risk. The same logic applied to this week's cut. However, Powell was very clear that the FOMC wasn't trying to get into accommodative territory. These cuts are viewed as moving Fed funds closer to the neutral. Some members of the committee believe interest rates are almost

at neutral, while others believe there are still a ways to go. That seemed to be the core disagreement among FOMC members. Powell said, We've cut 50 basis points in the past two meetings. There's a sense from some, let's pause here, a sense from others wanting to go ahead. But that's why I say differing views, strongly differing views. Notably, however, Powell didn't indicate that anyone on the committee believes the economy is weak enough to demand accommodative policy. The Fed isn't looking to cut rates to boost the economy.

They're only looking to dial back on restrictive policy. The AI boom or AI bubble was a big topic of conversation among the press as well. Powell was asked whether the existence of an infrastructure boom is evidence that interest rates aren't restrictive enough. He commented, I don't think that the spending is especially interest-sensitive. It's based on longer-run assessments that this is an area that's going to drive higher productivity. Powell noted that a lot of companies are announcing AI-related layoffs, but commented, it could absolutely have implications for job creation, but we don't really see it in the initial unemployment claims data yet.

One member of the press suggested that maybe the Fed should actually raise interest rates in order to stabilize the labor market. The stated logic was that lower rates are allowing more AI investment leading to job loss, so the Fed should actually be hiking to protect jobs. Powell commented, I don't think interest rates are an important part of the data center story. People think they have great economics building these data centers. It's not about 25 basis points here or there. By lowering rates at the margin that will support more hiring, that's why we do it. Taking yet another question on whether this is a bubble, Powell said, you know, we don't look at anyone asset price and say, hey, that's wrong. It's not our job to do that. We look at the overall

financial system and ask if it's stable and whether it can withstand shocks. He noted that banks are well capitalized, households are in pretty good shape on average, and you don't see too much leverage in the banking system or the financial system. He concluded, it's a mixed picture, but it's not an overly troubling picture. We don't set asset prices. Markets do that. Powell was asked if he's concerned about a sudden pullback on AI spending and whether he's taking any lessons from the dot-com bubble. He responded, this is different in the sense that these companies actually have earnings. If you go back to the 90s, there were these ideas rather than companies, so there was a clear bubble there. It looks like these companies have business models and profits, so it's really a different thing.

Circling back to the government shutdown, Powell was asked if he was concerned he would need to start making policy by anecdote. He responded, this is a temporary state of affairs. We're going to collect every scrap of data we can find, evaluate, and think carefully about it. You could imagine it's going to affect the December meeting. There's a possibility it would make more sense to be cautious about moving. If you're driving in fog, you slow down. As so often is the case, the clear takeaway from the Fed meeting was that there was no clear takeaway. Powell took multiple rate cuts off the table and made the future policy path a complete question mark. Markets were a little mixed in their response. Both major stock indices

dropped hard as Powell said that a December cut was not a foregone conclusion, however, they recovered strongly to end the day basically flat. Part of the explanation is probably that we're in the middle of tech earnings, and no one really wanted to be selling into Wednesday night's reports. Meta and Microsoft disappointed and dropped after they reported, however Google recorded a massive beat, up their Kappex forecast and the stocks were by 6.5%. That's exactly the kind of move you wouldn't want to miss out on because Powell was undecided. Bitcoin gave a clearer macro read, falling throughout the day and dipping to 108,000 as Powell was on the podium. While it recovered slightly in the afternoon, Bitcoin dropped again overnight after Trump

reported a fairly piecemeal resolution to trade negotiations with China. Overall, Bitcoin was down 3.8% on the day. Coming away from it, it was a pretty disappointing end to a week that was supposed to put Bitcoin back on course. All week, analysts were expecting a series of positive catalyst to hit and herald a return of the bull market. Instead, we got a surprisingly hawkish Fed meeting and a nothing burger of a trade deal. Overall, there's not much that can be known for the moment. Markets were looking for the all-clear, the end of QT, a rate cut, and clear dovish guidance. Instead, Powell kept everyone guessing about what comes next. NYU Stern Professor Austin Campbell commented, the Rorschach market. The Fed is locked on the current pathway until

data is disruptive enough to change the narrative in the minds of the voting members of the FOMC. Without that change, it looks like maybe one more cut to end the year, and then it's anyone's guess what happens next. Quinn Thompson of Lacker Capital tweeted, Powell's term as chair ends in six months and his successor will be known even sooner, creating a shadow fed chair situation. It remains clear to everyone and the market that the new chair will be friendly towards and help effectuate the admin's agenda. Given that, it's difficult for me to paint a risk asset bare case based upon liquidity dynamics and all signs point to continued massaging to support markets. In the short term, however, as Powell said, further rate cuts are far

from a foregone conclusion. That's going to do it for today's breakdown. Appreciate you listening, as always, and until next time, be safe and take care of each other. Peace.