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Thought of the day

US equities stood at record highs, while Treasury yields fell ahead of today’s highly anticipated Federal Reserve interest rate decision, where a 25-basis-point cut is fully priced in. The S&P 500 rose 0.2% on 28 October, and the 10-year Treasury yield stayed below 4%.

But while a rate reduction is widely expected, investors will be looking for clarity as to when officials will stop shrinking the central bank’s portfolio of securities, as well as validation of market expectations for further easing.

A definite timing on the end of quantitative tightening should support risk sentiment. Fed Chair Jerome Powell earlier this month said the central bank is nearing a point where it will stop reducing the size of its bond holdings, and markets increasingly expect such an announcement at the conclusion of the Fed’s two-day policy meeting today. An end to quantitative tightening would be interpreted as a dovish shift, likely pushing Treasury yields lower and supporting risk assets.

Guidance on the policy path forward could offer validation on investor optimism. While Powell’s earlier comments about weakness in the labor market set the stage for a cut today, he offered little specific guidance on the central bank’s easing trajectory. With markets currently pricing in 100 basis points of further cuts by June 2026, investors will be hoping for hints about the policy outlook. In our view, evidence of a weakening labor market should provide justification for more rate cuts through the early part of next year.

How the Fed navigates the ongoing government shutdown is also key. As the current government shutdown approaches the one-month mark with no immediate end in sight, investors will also be seeking clarity on how the US central bank will make future policy decisions based on partial data. But despite having less visibility on the economy, we expect private data releases to continue to help sketch the economic picture. Additionally, extended government shutdowns historically yield little for the party forcing the shutdown, and the recent call by the largest federal worker union to end the shutdown could add further pressure on lawmakers.

Overall, we expect the Fed to press ahead with its rate-cutting cycle and gradually end quantitative tightening, bolstering the case for quality fixed income as a source of income and portfolio resilience. We recommend investors consider medium-duration high grade government and investment grade corporate bonds. We also expect gold to benefit and maintain our year-end target of USD 4,200/oz, while an easing Fed should continue to support the backdrop for equities.