Most eyes will be on the US Federal Reserve’s FOMC today as expectations of a cut to interest rates remain heightened. US inflation data released last week came in softer than expected, adding fuel to the already strong anticipation of a cut on the October 29 meeting.
As markets await the Federal Reserve’s latest policy decision, investors are positioning for what could be a pivotal moment in the U.S. monetary cycle, says David Morrison, Senior Market Analyst at FCA-regulated fintech and financial services provider Trade Nation.
Morrison shares his insights on what traders should be watching – from the Fed’s next move on rates and quantitative tightening to the implications for global equity market saying: “Investors expect the Federal Reserve to announce a rate cut of 25 basis points after the two-day FOMC meeting, which ends tomorrow. Looking ahead, the CME’s FedWatch Tool assigns a 95% probability to a further quarter-point cut in December.
“Traders will be watching closely for any guidance from Fed Chair Jerome Powell over future rate cuts, especially given growing concerns about labour market weakness. With the ongoing government shutdown limiting economic data releases, the Fed faces a more uncertain policy backdrop than usual.
“But perhaps the most important aspect of tomorrow’s announcement will be any further details that Mr Powell provides over the ending of quantitative tightening (QT), or the Fed’s balance sheet reduction programme.
“He signalled that this was the Fed’s plan back in September. But he didn’t give much guidance concerning when it would start or at what pace. Rolling back QT would mean additional monetary stimulus for markets.
“The promise of easier monetary policy from the Fed has helped push US stock indices to a succession of record highs, and this has dragged global indices up as well.
“Add in the prospect of a trade deal between the US and China, and expectations of strong earnings from the US tech sector, and you have a heady brew sloshing around the punchbowl. The question for traders is, just how much they can drink before they start to feel decidedly queasy.”
Erik Weisman, Chief Economist and Portfolio Manager of MFS Investment Management, shares his comments ahead of this week’s FED meeting and agrees that a… “25bp cut appears to be a foregone conclusion on October 29th given labor market concerns.
“The September CPI print is based on a limited sample with a high noise-to-signal ratio and is unlikely to sway the FOMC decision one way or another. There seems to be faith in the thesis that tariffs are a “one-time price shock.” Upside surprises in services inflation have not been a major part of the discourse either. Instead, the Fed’s focus has been on weak payrolls. Labor market slack, via its influence on wages, plays a critical role in determining services ex-shelter inflation. Given this context, the laser focus on jobs is not misplaced. Thus, at this juncture, the labor side of the mandate is dominating. If inflation remains sticky at a high run rate well into the first half of 2026, the Fed may loosen less than the market is pricing, but that would be a story for a later date.
Waller, one of the most dovish members of the FOMC, recently mentioned that he is looking for data to reconcile the apparent disconnect between the weak labor market and robust spending. His unraveling of this puzzle will be critical for him in deciding the course of policy beyond October. Meanwhile, that conundrum may be especially difficult to disentangle any time soon given that it remains unclear whether the Fed will have enough government-sponsored, high-quality macro data by December 10. Thus, chances are Powell and others will be non-committal about December and will stress data dependency when the data come back online.
“This does not mean that the December meeting will be uneventful. Recent behavior of SOFR suggests a rise in funding market pressures and Powell acknowledged the issue in his recent comments. There is deep awareness and desire to avoid a repeat of repo market strains witnessed in 2019. Consequently, the Fed may signal that it will provide concrete guidance on ending QT in December, with the potential for a surprise announcement ending QT even sooner.”
Adding her latest thinking on tomorrow’s Fed decision as well as what’s happening with US equites, Daniela Sabin Hathorn of Capital.Com said: “US equities continue to move higher driven by a combination of fundamental factors. First, easing inflation and the prospect of looser monetary policy have reduced recession risk and pushed discount rates lower. At the same time, earnings have held up, with many companies beating expectations and forward growth estimates ticking higher. Add to that the AI-driven capex boom—especially in chip, hardware and cloud infrastructure—and you have a structural growth narrative that extends well beyond a simple cyclical rebound. The momentum has spread globally with optimism about a trade deal between the US and China growing, despite no official confirmation yet.
“However, investors are moving with a little more caution on Tuesday as there are significant risk events ahead, including the FOMC meeting and the start of the MAG7 earnings reports. A hawkish surprise from the Federal Reserve – potentially from Powell failing to give into the markets aggressive pricing of rate cuts in 2026 – stands as a key risk to the upside in equities this week, followed closely by disappointing earnings guidance from some of the top companies. The outlook for equities is going to depend largely on how these factors interact, with a confirmation from the Fed of future cuts and a positive guidance outlook from the MAG7 as the ideal scenario for more upside. However, a disappointment in either of those factors could lead to choppy trading going forward.”
