October 2025 FOMC Preview QT out, flexible reserves in… (Podcast Edition)
At a Glance
The desk anticipates a significant shift in monetary policy as the Federal Reserve is likely to cut rates by 25 basis points at the upcoming FOMC meeting, potentially signaling the end of its quantitative tightening (QT) program. Per the full note from MUFG EMEA, George Goncalves highlights the impact of the government shutdown and evolving US trade policy on these expectations. As reserves continue to dwindle, this meeting could provide clarity on the Fed's path forward, possibly concluding QT by year-end. This perspective aligns with our view that the Fed is pivoting towards a more accommodative stance, which could influence currency markets significantly.
Key Takeaways
Full Analysis
What the desk is arguing
MUFG's George Goncalves expects the Fed to cut rates by 25bp at the October FOMC meeting, with the main focus on signaling the end of quantitative tightening. He believes the meeting could be a platform to outline a path to conclude QT by year-end, as Chair Powell has hinted at approaching the terminal point. This dovish stance is reinforced by ongoing government shutdown risks and trade policy uncertainty.
The desk argues that with reserves still shrinking, the Fed will want to avoid a repeat of September 2019 repo turmoil, prompting a gradual exit from QT. They expect the Fed to shift to a flexible reserves regime, which supports a steepening of the yield curve. The implicit counterfactual is that the Fed could maintain QT for longer, but MUFG sees the balance sheet normalization as largely complete.
Where it sits in our coverage
Our consensus target for EUR/USD stands at 1.10 for end-2025, with a firm spread of 1.05-1.12 reflecting our expectation of a weaker USD. This view aligns with MUFG's dovish Fed outlook, as a more accommodative Fed would weigh on the dollar. However, our timeline extends beyond the near-term FOMC meeting and focuses on structural drivers like fiscal divergence and trade policies.
Specific firms in our coverage have published targets for EUR/USD: * JPMorgan: 1.12 (Mar-26) * Goldman Sachs: 1.08 (Dec-26) * Morgan Stanley: 1.13 (Jun-26) Our consensus of 1.10 for end-2025 sits between these targets, reflecting a balanced view.
How other firms see it
JPMorgan is aligned with MUFG's dovish view, expecting a cut and near-term dollar weakness. Goldman Sachs takes a contrary stance, arguing the Fed will hold steady amid sticky inflation and a resilient economy. Morgan Stanley is aligned on the cut but sees limited further easing, which tempers the dollar-negative impact.
Overall, the market consensus leans toward a cut at this meeting, but the key divergence is on the path beyond: MUFG sees QT ending, while firms like Goldman expect QT to continue into 2026, implying a slower unwind.
Market Implications
The implication is USD-negative in the near term, with a steeper yield curve as QT unwinds. EUR/USD could test the 1.12 level if the Fed delivers a dovish cut. However, the impact may be limited if the market already prices in the cut.
From the original
George Goncalves, Head of Macro Strategy for the Americas, shares our latest macro perspectives in light of the government shutdown and ongoing updates to US trade policy. However, the main focus was on the teams expectations for the upcoming FOMC meeting. In addition to expectin
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