At a Crossroads

In October 2025, the US Federal Reserve signalled that it may proceed with multiple rate cuts in the coming months, as cracks begin to appear in what was once considered the world’s most resilient labour market. Federal Reserve Governor Christopher Waller’s remarks, suggesting a further 25-basis-point cut at the end of October, came against a backdrop of slower job creation, subdued consumer confidence, and a federal government shutdown that has begun to strain the US economy.

This marks a pivotal moment in global monetary policy. For much of the past two years, central banks have been navigating a complex terrain defined by the aftermath of pandemic stimulus, elevated inflation, and geopolitical instability. Yet, as inflation in the US has now fallen closer to the Fed’s 2% target, the central bank’s attention is clearly shifting from fighting price pressures to sustaining growth and employment — a transition that is already reverberating across global markets.

The US labour market, long hailed as a bastion of post-pandemic recovery, is now showing unmistakable signs of cooling. The September 2025 jobs report indicated that monthly payroll growth had fallen to just 90,000 — the weakest in over two years. Unemployment has edged up to 4.2%, while wage growth, once the main driver of inflation, has plateaued. Job openings have declined for the fifth consecutive month, particularly in sectors like manufacturing, retail, and logistics.

For policymakers, these figures signal more than just a cyclical slowdown. The US economy is grappling with structural shifts: automation displacing low-skill labor, supply chain reshoring altering industrial demand, and consumer spending being reined in by high household debt and elevated borrowing costs. With real wage growth stagnating, consumer sentiment has fallen to a three-year low, undermining the spending that underpins nearly 70% of US GDP.

Compounding these challenges is the ongoing government shutdown, triggered by a budget standoff in Congress. Non-essential federal services have been suspended, and hundreds of thousands of workers are either furloughed or working without pay. Historically, shutdowns have had limited macroeconomic impact if resolved quickly. But this one, now stretching into its third week, coincides with a fragile economic environment and declining business confidence.

Economists warn that if the shutdown persists into November, quarterly GDP growth could be shaved by as much as 0.3 to 0.4 percentage points. Delays in federal spending, data releases, and regulatory approvals are already disrupting business operations. More subtly, the shutdown has reinforced perceptions of political dysfunction in Washington — a factor that weighs on financial markets and the dollar’s global credibility.

In this context, the Federal Reserve’s rate-cut signaling assumes a dual role: it is not merely an attempt to pre-empt a recession but also a means of restoring investor confidence in the face of political paralysis.

Governor Waller’s remarks echoed a growing consensus within the Federal Open Market Committee (FOMC): the risk balance has shifted. While inflation had been the dominant concern in 2023 and early 2024, recent data show it hovering around 2.3%, well below last year’s highs. With energy prices stable and supply chains normalizing, the argument for keeping interest rates at restrictive levels has weakened considerably.

At the same time, the Fed must tread carefully. Premature or overly aggressive cuts could reignite inflation or trigger financial instability, particularly if markets interpret them as a sign of panic. Yet the cost of inaction may be higher. Rising corporate bankruptcies, tighter credit conditions, and weakening consumer demand suggest that maintaining a “higher-for-longer” stance could push the economy into an unnecessary contraction.

For now, the Fed’s baseline appears to be a gradual easing cycle: a 25-basis-point cut in October followed by one or two more in early 2026, contingent on economic data. This would bring the federal funds rate closer to 4.75%, down from its mid-2024 peak of 5.5%.

US monetary policy decisions rarely remain confined to domestic borders. The dollar’s central role in global finance means that every shift in the Fed’s tone reverberates worldwide. A sustained rate-cut cycle could lead to a weaker dollar, capital inflows into emerging markets, and relief for countries burdened by dollar-denominated debt.

India, for instance, could benefit from renewed foreign investment and a potential easing of global liquidity conditions. However, the flip side is that sudden currency appreciation could undermine export competitiveness. Meanwhile, European and Asian central banks — many of which are also grappling with sluggish growth — may feel pressure to follow suit, ushering in a synchronised easing cycle reminiscent of the early 2010s.

The broader question is whether the Fed’s shift signals a cyclical slowdown or a deeper transformation in the global economic order. The combination of aging demographics, deglobalisation, and technological disruption suggests that economies may be entering an era of structurally lower growth — one where central banks play a diminishing role as engines of expansion.

The Federal Reserve’s challenge is not merely technical but philosophical. Its dual mandate — maximum employment and stable prices — has always required balance, but the context has evolved. Inflation, once seen as the ultimate threat, now shares the stage with financial fragility, political dysfunction, and inequality.

As markets brace for the next policy announcement, the real test for the Fed will be credibility. Can it guide the US economy to a soft landing without reigniting inflation or eroding investor trust? Or will its caution come too late to avert a deeper downturn?

What is clear is that the Federal Reserve’s actions over the next few months will not only shape the trajectory of the US economy but also determine the rhythm of global markets. In an age of uncertainty, monetary policy remains one of the few levers of stability — yet even that lever is beginning to strain under the weight of political and structural realities.