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The Fed’s second consecutive 25 bp cut was expected, but Powell’s press briefing signaled a pivot toward caution. A divided FOMC and limited data—due to the government shutdown—have raised the threshold for further easing. With growth stabilizing and inflation sticky, insurance cuts appear complete. Market pricing of 1 pp in additional cuts looks aggressive even as the Fed appears willing to tolerate modest inflation overshoots to preserve employment stability. In our view, UST 10Y yields below 4% are unsustainable as 1pp rate cuts are fully priced in and lower UST yields make long duration borrowing (borrowing mix to shift away from T-Bills) more attractive thus putting upward pressure.
Fed cuts again, but Powell pushes back on December rate cut expectations
The Federal Reserve delivered a second consecutive 25 bp rate cut, lowering the Fed Funds target range to 3.75–4%, and announced the end of Treasury runoffs starting December 1. However, Chair Powell used the post-meeting press conference to challenge market expectations of a December cut, stating it was “far from” a certainty. His remarks triggered a swift market reaction, reflecting a recalibration of rate path expectations.
Diverging views & data blackout complicate outlook; a higher bar for easing
Powell highlighted a “growing chorus” within the FOMC questioning the need for further easing. The government shutdown has created a data vacuum, and this is amplifying internal divisions, as some officials remain concerned about sticky inflation—partly driven by tariffs—while others worry about weakening demand in rate-sensitive sectors.
Insurance cuts are now over, growth outlook remains strong and inflation sticky
The rate cuts thus far were insurance against a potential weakening in the labor market. However, the growth outlook has recovered while inflation remains sticky. Inflation expectations (2Y ahead) are now 40bps lower vs. in Aug but remain elevated. While a December cut remains plausible, it now faces a higher hurdle, especially in the absence of compelling labor market deterioration. In our view, market pricing of fed funds rate at 3% by Dec-26 is slightly aggressive (influenced by political considerations) as restrictive monetary policy is necessary to bring inflation back to target.
1pp rate cut priced in; UST 10Y yields below 4% unlikely to sustain for very long
We are now in the era of higher-for-longer rates. Higher reliance on T-bills (post Mar-25) to finance deficits have kept UST rates under check: share of incremental issuances over 3M via T-Bills was -10% in Mar-25 but rose to 45% in Aug-25. Lower rates on 10Y bonds make long duration borrowing more attractive thus putting upward pressure. Hence, UST rates are unlikely to remain below 4% on a sustainable basis despite rate cuts.
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