Fed Poised to Cut Rates and End QT: Powell’s Biggest Pivot Yet?

The Federal Reserve enters this week’s October policy meeting facing a uniquely opaque economic backdrop, and yet one outcome seems virtually assured: a 25-basis-point rate cut . According to the CME FedWatch Tool, futures markets are assigning a 98% probability that policymakers will lower the federal funds target range to 3.75%–4.00%, marking the first sub-4% level since late 2022. The bigger question is what comes next—whether Chair Jerome Powell and colleagues will signal another cut in December or pivot the conversation toward the end of quantitative tightening (QT). With the government shutdown now stretching into its fourth week and data releases at a standstill, the Fed will be navigating with “blurred vision,” as Powell described in his October 15 speech.

Despite limited data, the broad message from recent private surveys and the September CPI report supports further easing. Headline inflation came in slightly below forecasts at 3.0% year-over-year, while core inflation slipped to its lowest level since June. That cooling gives policymakers cover to proceed with the rate cut they effectively pre-committed to in September. The concern, however, is whether policy easing based on stale and incomplete data could risk overaccommodation just as the inflation battle remains unfinished. Powell’s remarks suggest the Fed sees labor market deterioration—not inflation—as the greater risk. The Chair pointed to a “no-hire, no-fire” dynamic, where both hiring and layoffs are subdued, implying fragility beneath the surface. With immigration restrictions constraining labor supply and tariff-driven goods inflation distorting price signals, Powell has acknowledged that the Fed’s tools are poorly suited to addressing these structural pressures.

Against that backdrop, the Fed’s other lever—its balance sheet—is now in focus. Quantitative Tightening, or QT, has been running since mid-2022, steadily shrinking the Fed’s holdings of Treasuries and mortgage-backed securities by roughly $20 billion per month. That process has brought the balance sheet down from a pandemic-era peak of $9 trillion to about $6.6 trillion, but it has also drained reserves from the banking system. With reserves now around $3 trillion—roughly 10% of GDP—markets are growing uneasy about liquidity conditions. Analysts recall that when reserves dropped below 7% of GDP in 2019, repo market rates spiked violently, forcing an emergency Fed intervention. To prevent a repeat, several major banks, including JPMorgan and Bank of America, expect Powell to announce the end of QT either at this meeting or before year-end.

Ending QT would represent a subtle but significant policy pivot. It would not be “QE” in name—the Fed would likely frame it as ensuring “ample reserves” rather than outright stimulus—but markets would interpret it as dovish liquidity support. Mechanically, ending QT would mean the Fed stops allowing Treasuries to roll off its balance sheet, while likely maintaining passive run-off of mortgage-backed securities. Some strategists, like Barclays, even float the possibility that the Fed could begin limited purchases of T-bills to manage liquidity without appearing to restart full-scale quantitative easing. The signaling effect would be powerful: an acknowledgment that liquidity, not inflation, is now the binding constraint on financial stability.

Financial markets are already trading with that expectation. The two-year Treasury yield has drifted toward 3.5%, its lowest since the summer, and the 10-year is hovering near 4%. Equities have rallied on the view that the Fed is transitioning from “higher for longer” to “careful normalization.” Still, the 25-bp move this week is fully priced in; what investors want is confirmation that liquidity tightening is ending and that December could bring another cut. According to Fed funds futures, the probability of a December rate reduction remains around 96%, though officials may try to keep that optionality open rather than promise it outright.

The government shutdown complicates the communication challenge. With key releases like employment, retail sales, and industrial production unavailable, Powell will need to lean heavily on private data and anecdotal evidence. The Atlanta Fed’s GDPNow model still points to 3.9% growth in Q3, but the Fed has consistently warned that headline strength masks weakening household confidence and hiring. ADP’s private payrolls report showed job losses in three of the last four months, and business surveys suggest softer hiring intentions. Powell is unlikely to sound alarmist, but expect him to underscore that the “balance of risks” has shifted decisively toward the employment side of the mandate—a phrasing that would justify another cut later in the year if weakness deepens.

If the Fed wants to subtly reinforce a dovish tone without committing to future cuts, it could tweak its post-meeting directive in several ways. First, it could remove or downplay language about “continuing to reduce holdings of Treasury securities and agency debt,” which would implicitly signal QT’s conclusion. Second, it might replace the phrase “carefully assess incoming data” with “remain attentive to evolving risks to employment,” elevating the jobs mandate in its hierarchy of concerns. Third, Powell could reintroduce the phrase “supporting the economy’s continued expansion,” which disappeared from recent statements but historically coincided with easing cycles. Finally, even a modest reduction in the interest rate on reserve balances—say from 4.15% to 4.00%—would underscore an intent to maintain ample liquidity across the banking system.

The stakes of these semantic adjustments are not trivial. With the Fed’s summary of economic projections and 'dot plot' off the table until December, the policy statement and Powell’s tone will drive market interpretation. A cautious, “one-and-done” framing would disappoint equity bulls who see two cuts before year-end. A more open-ended acknowledgment of downside risks could fuel expectations for a December follow-up move and perhaps another in early 2026. The central bank is also aware of the potential feedback loop: easier policy is inflating risk assets, and officials are wary of over-stimulating markets already hitting record highs.

Still, in an environment defined by structural headwinds—restrictive immigration policy, lingering tariffs, and slowing rents—the Fed’s options are limited. Monetary policy can’t fix supply constraints or reverse demographic trends, but it can cushion demand and smooth liquidity. The likeliest outcome Wednesday is a carefully calibrated message: the Fed cuts rates 25 bps, declares QT effectively complete, and emphasizes vigilance on employment without promising another move. The nuance will lie in tone, not numbers. Powell’s challenge will be to sound flexible, not flustered; dovish, but not desperate.

In short, the October meeting won’t deliver surprises on rates—but it could quietly mark the end of QT and the start of a new phase in the Fed’s easing cycle. Markets, already celebrating a soft-landing narrative, may soon find that liquidity, not inflation, is once again the story driving the next leg higher.