Ethenea: The Fed is flying blind

Ethenea: The Fed is flying blind

October 24, 2025

Interest Rates Fed

The Federal Reserve (Fed) is expected to continue its risk-minimising interest rate cuts at the next meeting of the Federal Open Market Committee (FOMC) on 29 October 2025. That is the assessment of Jörg Held, Head of Portfolio Management at ETHENEA Independent Investors S.A.

Despite the lack of or imprecise data, the members of the central bank unanimously agree that the labour market should be given top priority. The weakness of the labour market must be countered with determination. Consequently, a reduction in the key interest rate to between 3.75 and 4.00 per cent, a fall of 25 basis points, is virtually certain.

According to some Fed members, a further interest rate cut is expected in December. Chairman Jerome Powell expects the outlook to remain largely unchanged, while Governor Christopher Waller wants the cut to be viewed purely as a risk management measure and is urging caution in future decisions.

Shutdown causes data blackout

The ongoing government shutdown has resulted in the postponement of important economic data publications, including those relating to retail, industrial production and the labour market. This makes it difficult to assess the current economic situation transparently and forces the Fed to proceed without visibility. This is particularly true of inflation: while the consumer price index data for September was reliable, the data collected in October is not. Furthermore, each week of the shutdown reduces annualised gross domestic product growth by around 15 basis points.

Liquidity bottlenecks lead to the suspension of quantitative tightening (QT)

In addition, short-term money markets are showing signs of liquidity stress, despite an expected interest rate cut. The effective federal funds rate (EFFR) rose to 4.11 per cent, which, without an interest rate decision, is evidence of a lack of liquidity. Furthermore, excess liquidity (reverse repo) fell to four billion US dollars.

Equally worrying is the fact that the Fed's emergency repo facility (4.25%) was used unusually heavily on 16 October, with 8.35 billion US dollars borrowed. These tensions, exacerbated by ongoing balance sheet reduction (QT) and significant Treasury settlements, reinforce the idea of an impending liquidity crunch.

Consequently, the Fed is expected to reduce the pace of QT, potentially by setting the monthly outflow limit for Treasuries at zero, to ensure there are sufficient reserves in the system. Our Ethenea portfolio management team anticipates a corresponding announcement at the end of October.

Focus remains on supporting the labour market

The interest rate cuts announced this year are primarily intended as insurance against economic risks. Given growth expectations, further cuts in the coming year will normalise the rate to a neutral level. We expect the key interest rate to continue its downward trend, remaining in the 3.00–3.25% range until mid-2026 while the Fed continues to support the labour market.

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