Powell Leaves Questions on Further Cuts

The Halloween week Fed meeting was more trick than treat for bonds with only a mild and temporary scare for stocks. As soon as Chair Powell signaled the next cut is “not a foregone conclusion – far from it!,” the Dow swooned before recovering about half the drop, while the 10-year drifted higher.

That split makes sense: stronger real-side data is lifting term yields even as earnings and spending bolster equities. We’ve moved from an inverted curve to a modestly positive term structure—Fed funds ~3.9% at the midpoint versus a 10-year near 4.1%—still well below a normal 100 bps slope but a step towards normalization. With six weeks of consumer and labor prints ahead of the December 10 FOMC, the Committee hasn’t decided anything—and Powell, who hates surprising markets more than any prior Fed chair, just told you that plainly.

The economy is sturdier than most expected entering Q4. ADP is shifting to weekly updates on the jobs situation that will further cut through the supposed “data fog.” On inflation, the message under the hood is constructive: rents—42% of core CPI—are finally easing; “financial services” and insurance quirks in inflation numbers have little to do with the policy rate; and goods are being distorted by tariffs. This is an economy where prices are edging lower for the right reasons and growth is still running above stall speed.

Inside the Fed, there were real debates, punctuated by an unexpected hawkish dissent on one side and the anticipated dovish dissent on the other. That dispersion alone argues that the Fed will be acutely data-dependent into year-end. My baseline: one additional 25 bp cut in December (but this is close) and then a pause. If holiday spending clearly softens—and we will see it in bank card data, retailer commentary, and claims—a December cut is a slam dunk. If consumption stays resilient, December is a hold and January becomes live. The curve’s message is consistent with that path: the 10-year can trade up toward ~4.25% without threatening the equity bull case; that level is not “scary” if earnings momentum persists.

Balance-sheet policy added an underappreciated wrinkle. The Fed is steering MBS run-off into T-bills and hinted at trimming portfolio duration toward the Treasury market’s broader mix—another nudge away from mortgages and toward a simpler, all-Treasury balance sheet over time. With the RRP facility near zero, reserves are edging from “ample” toward “scarce,” which is why ending QT is on the table sooner than many thought. Importantly, even a flat headline balance sheet keeps reserves drifting down as currency in circulation rises—tightening at the margin without fanfare. None of this should swing markets near-term.

Earnings remain the bright spot. Big Tech’s prints and, crucially, 2025–26 AI capex plans underscore why this cycle is different from 1999: these are real firms with real cash flows, not concept stocks. Could exuberance morph into a late-year chase? Yes—positioning anxiety is rising for managers lagging benchmark weights in the “Magnificent” cohort. But outside mega-cap tech, valuations are far from euphoric. By our calculations, the non-Mag7, non-Tech slice of the S&P 500 trades near a 19–20x market-cap-weighted P/E—reasonable with disinflation and positive growth. That’s fertile ground and supportive for further gains.

Policy and geopolitics are also heading in the right direction. A détente in trade tensions with China following Trump’s Asia trip puts some of worst-case scenarios behind us and we can stay focused on company fundamentals.