Fed October rate cut prompts market rethink

At the Fed’s October meeting, the Federal Open Market Committee (FOMC) chose to reduce its target policy range by 25 basis points to 3.75%-4.00%.¹ This had been widely anticipated by financial markets though the decision was not unanimous. Discord from the FOMC could have led Chairman Powell to be more hawkish during his press conference when commenting on market pricing of a December rate cut by saying, “it is not a foregone conclusion, far from it”. Future cuts will be even more data dependent, bearing in mind that a prolonged US government shutdown limits data visibility.

Regardless, we continue to expect a December rate cut as the US economy slows and unemployment picks up in Q4, and we think market expectations for successive rate cuts may be more extreme than should be warranted. We expect the Fed to maintain a gradual easing path, with the policy rate potentially reaching 3.00-3.25% by end-2026. The exact timing of the rate cuts matters less than the broad direction of travel.

The Fed also announced the end of its quantitative tightening program effective December 1, 2025. This is not outright easing but does remove a tightening force.

Financial markets initially reacted negatively with the S&P 500 at one stage down 0.5% but has since largely recovered. Treasury yields rose across the curve as markets scaled back expectations for a December rate cut. Fed Funds Futures now imply roughly a 70% probability, down from 92%, and the expected policy rate for end-2026 has shifted up to 3.05% from 2.95%.¹

We have long maintained that the US 10-year yield below 4.0% was unsustainable and we would not be surprised to see further upward pressure on long-term yields in the coming months and quarters. Additionally, the Fed is likely to ease more aggressively than most major central banks which could support US equities with potential further dollar depreciation. A weaker USD coupled with better growth outside the US could support emerging market (EM) equities and EM debt - which remain more attractively priced than US assets.

While we maintain a constructive outlook on gold due to continued central bank and retail buying, we think gains in the coming year could be more limited due to lower geopolitical risks and a broadly more stable inflation outlook.

* With contribution from Paul Jackson and Thomas Wu. 

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