Federal Reserve officials are sharply divided on the future path of interest rates, casting significant doubt on the likelihood of a December rate cut and prompting a notable shift in market expectations.
The minutes from the Federal Open Market Committee (FOMC) meeting on Oct. 28–29, 2025, released Wednesday, showed a clear split among participants after they decided to lower the target range for the federal funds rate to 3.75%-4.00%.
While many participants favored the October rate cut, some of them said they could have supported no change. The more crucial division emerged in discussions of future policy moves.
Fed Minutes Reveal Deep Divide, December Rate Cut Hopes Fade
Several participants assessed that a further lowering of the target range for the federal funds rate could well be appropriate in December if the economy evolved as they expected. This optimism, however, was countered as “many participants suggested that, under their economic outlooks, it would likely be appropriate to keep the target range unchanged for the rest of the year.”
Furthermore, all participants agreed that monetary policy was not on a preset course and would be informed by a wide range of incoming data.
The probability of a December rate cut has significantly diminished following the release of the FOMC minutes.
Participants said core inflation remained elevated as disinflation in housing services had been more than offset by higher goods inflation, reflecting the effects of tariff increases earlier this year.
Market participants quickly adjusted their expectations.
The CMEFedWatch tool now shows a 66% chance of interest rates holding steady at 3.75%-4.00% next month, with only a 34% chance of a $25$-basis-point cut.
This represents a major shift from the 50-50 chance priced in just before the minutes' release, and a complete reversal from last week, when investors were pricing in a 65% chance of a cut.
Financial Stability And AI Bubble Concerns
Officials voiced concerns about potential financial market instability, particularly surrounding the AI boom.
Several participants highlighted the possibility of a disorderly fall in stock prices, especially in the event of an abrupt reassessment of AI-related prospects.
The minutes noted that broad equity indexes continued to rise, boosted by large technology companies on market participants' optimism about AI.
This surge in valuations raised alarm bells.
“The staff judged that asset valuation pressures were elevated. For public equities, price-to-earnings ratios stood at the upper end of their historical distribution,” the minutes said.
Market Reactions
Wall Street reacted by trimming the modest gains seen earlier in the session, reflecting investor disappointment over the reduced chance of a rate cut.
The Nasdaq 100 was only 0.1% higher to 24,520 points by 2:45 p.m. ET. In contrast, the broader S&P 500 was virtually flat.
The Dow Jones dropped 130 points, translating to a 0.3% decline to 45,960.
Nvidia Corp. (NASDAQ:NVDA) was 1.7% higher ahead of its earnings release after the close.
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