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Central Bank Watch

CAN POWELL SOUND HAWKISH TOMORROW

ADMIN || 29th October 2025

The Treasury market may be setting itself up for disappointment if Fed Chair Jerome Powell resists validating the market’s aggressive rate-cut timeline on Wednesday.

With a December cut nearly fully priced and January odds above 50%, the Fed chair could seize the moment to remind investors that growth remains firm and inflation sticky arguing conditions aren’t as weak as the market narrative suggests. That setup leaves the risk skewed toward a hawkish surprise, particularly if Powell sounds noncommittal about further easing.

The curve is flatter and the long end about 10 bps richer than it was at the September FOMC, reflective of the ongoing government shutdown and corresponding data vacuum. Even a modest recalibration in expectations could trigger a temporary backup in yields. Still, any such selloff is likely to prove fleeting, with policy and data momentum still biased toward gradual easing into 2026.

In one of the few data sets released today, consumer confidence data showed that expectations for the job market weakened, with a greater share of consumers expecting fewer available jobs in the next six months, and their outlook on income prospects were less positive. The headline US consumer confidence fell in October for a third straight month on dimmer views about the outlook for the economy and labor market. The Conference Board’s gauge decreased 1 point to 94.6, the lowest since April. The median estimate in a Bloomberg survey of economists called for a reading of 93.4.A measure of expectations for the next six months fell in October to 71.5, the lowest since June.

QT headlines could add nuance but are unlikely to dominate the reaction. We may see the reemergence of “not-QE QE” or “stealth QE” as it is better known, with the Fed shoring up bank reserves by purchasing bills. We expect Fed might embark on regular purchases, solely in Treasury bills, as part of reserve management operations at the beginning of 2026, at a pace of about $10 billion per month to bolster the amount of cash in the financial system.

We also believe that the Fed might introduce temporary open market operations to alleviate strains in overnight markets that tend to occur around Treasury settlement dates, quarter and year-end periods and other key payment dates. The Fed could also lower the rate on its main liquidity backstop, the Standing Repo Facility, which it introduced after the 2019 turmoil and has seen regular use in recent weeks.

So to summarise while Powell might still nuance the rate cut as a risk management tool (implying a hawkish nature), Fed’s actions on QT might nullify the resultant effect on bond yields and risk assets.

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