The FOMC will likely deliver a second consecutive 25bp cut at next week’s October meeting along with a dovish dissent from Governor Miran. Powell’s press conference will likely reiterate some easing bias in light of yesterday’s soft CPI prints but Powell might still use the meeting-by-meeting framework for future policy decisions. More importantly we expect an announcement ending QT at this meeting. Recent signs of pressure in funding markets suggest reserves are no longer “abundant,” accelerating the timeline for ending QT and an eventual pivot to reserve management purchases. We expect MBS rundown to continue, with proceeds reinvested into treasury bills. We continue to believe in a front-loaded rate cut cycle by Fed of 25 bps each in the next 4 meetings bringing the terminal rate to 3% by March’26. Inflation is remaining well behaved in spite of tariff pressures on goods prices due to weakening shelter prices. Private employment data is showing cracks all over the place and is likely to show a large -ve no in Oct NFP if it were to be released in early Nov. A lack of meaningful political movement keeps us thinking that the government shutdown will continue into November. In our base case, the government will reopen in mid-November, but the risk is an even more extended shutdown. A mid-November reopening would mean the September, October, and November jobs reports might all be released in late November and early December, adding to volatility in markets. We believe as we move into end CY25, we are likely to see subdued employment nos as companies find themselves facing low consumption trends due to higher prices or consumption sacrifices due to higher prices. For cost rationalisation purposes, companies might tip the balance towards more firings than current state of low firing low hiring. By that time, tariff impact in good prices might have already played out leading to Fed prioritising it’s employment mandate over the price stability mandate.
