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Video: Paul Donovan on what next for the Fed (8 min)
Podcast: (18 min)

Federal Reserve Chair Jerome Powell on Tuesday laid the ground for an October rate cut, and surprised investors with a longer discussion about the US central bank’s quantitative tightening (QT) policy, which may be coming to an end sooner than widely thought. Market participants interpreted these remarks as dovish, with equities rising intra-session on the headlines, both 10- and 30-year Treasury yields dipped to multi-month lows, and gold broke above USD 4,200/oz. Fed fund futures show two additional cuts now almost fully priced by December, in line with our long-held forecast.

This more definitive line from Powell comes amid differing policy views from his peers, with a range of both dovish and hawkish Fed speaker quotes across the news-wires. Powell’s comments also come against the backdrop of an extended US government shutdown, which has clouded the Fed’s visibility on labor market conditions thanks to furloughs and delays in employment data collection and analysis.

With this all in view, we make several observations:

The Fed policy debate remains weighted toward incremental easing. While there is still a plurality of views within the Federal Reserve, on balance the FOMC appears to favor further rate cuts. More dovish officials, such as Bowman, Waller, and Miran, continue to advocate for more immediate easing, citing restrictive policy settings, labor market risks, and still-muted inflation. Recent changes to the Board have further tilted the consensus toward a more dovish stance. Although we do still hear some cautious commentary on cuts, it is largely focused on the timing and pace of reductions rather than disputing the overall direction. In our view, the public debate tells us that the Fed will calibrate both its policy and its communication carefully, but that ongoing rate reductions are still warranted even if opinions on the speed and magnitude may differ.

Data interruptions, tariff threats are unlikely to deter Fed. With the government shutdown delaying official labor data, Fed officials are supplementing their analysis with alternative sources. Labor market indicators remain soft, as both layoffs and hiring are subdued, and sentiment surveys continue to trend lower. Importantly, inflation data, including the September consumer and producer price indexes will still be available for the upcoming FOMC meeting, providing policymakers with some confidence on the inflation side of matters. And while US-China trade tensions have again resurfaced with President Trump’s 100% tariff threat, we note that Powell downplayed the risk of second-round inflation effects. Our base case on US-China trade is for compromise rather than escalation, which we think precludes tariffs from significantly altering the Fed’s policy trajectory at this time.

Powell signals quantitative tightening may end sooner, which could help with liquidity. Powell did surprise markets by implying that QT could end as early as December 2025, saying “we may approach that point in coming months, and we are closely monitoring a wide range of indicators.” With liquidity conditions tightening and repo rates firming, an earlier end to QT could help stabilize funding markets, reduce short-term rate volatility, and relieve upward pressure on repo costs. We expect this shift to anchor long-end yields below recent highs and support broader credit creation.

So, with the Fed on track to continue its rate-cutting cycle and to gradually end QT, we believe the case for quality fixed income as a source of income and portfolio resilience remains strong. We recommend investors consider medium-duration high grade government and investment grade corporate bonds, which offer attractive total return potential and diversification benefits, especially if economic activity slows and rates fall further. For those seeking yield, a diversified approach, including equity income strategies, diversifie d fixed income, and yield-generating structured investments, looks prudent. We forecast the US 10-year yield at 4.0% at end-2025, and 3.75% by mid-2026. History suggests quality bonds can outperform cash in adverse scenarios, and a multi-asset income strategy can help investors navigate the evolving macro landscape. The anticipate decline in real rates, potentially into negative territory, should further boost the portfolio appeal of gold, which could rise toward our upside case of USD 4,700/oz.