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.
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.
01MUFG expects a 25bp cut at the October FOMC meeting and a framework to end QT by year-end.
02The dovish stance supports a weaker USD outlook, aligning with our consensus for EUR/USD at 1.10.
03Key risk is that the Fed maintains QT longer than expected, causing a dollar rally.
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.
Risks to this view
Risks include: (1) a hawkish surprise if the Fed signals a slower end to QT, (2) a skip if inflation prints hot, and (3) renewed trade tensions boosting safe-haven USD demand.
Welcome to the MUFG Global Markets Podcast. I'm John Cook, and today I'm joined by George Goncalves, MUFG's Head of U.S. Macro Strategy.
It's Tuesday, October 28th, 2025. Welcome back to the podcast, George. Great to be back on.
Yeah, good to have you. So, George, as you all know, you are off a series of trips that has taken you literally around the world, South America, Japan, and somewhere in between Washington, D.C. I had the good fortune of joining you on the majority of that.
We got to speak to a lot of different investors, a lot of different views. It was a spectacular opportunity to learn a lot from our clients. So I think that informs some of your opinion, I know.
Switching back to the episode and perhaps the question at hand, we've got a big macro week here, and we really haven't had much in the way of data. As our listeners know, the government's been shut down for quite some time, and I think someone on your team pointed out that the odds are that it's going to extend into late November, but we've got some non-governmental releases. We received CPI this past Friday.
We have the Fed coming up later this week. Before we get to the Fed, what's your latest assessment of the macro backdrop currently, especially in light of sort of a dearth of real-time information? Yeah, absolutely.
So I think maybe just the fact that we got CPI actually is something worth at least highlighting and what we did learn from it and what is still taking place on the inflation front. At a minimum, I'm sure those in the markets are aware that the CPI was much more benign than expected, came a little bit softer. That said, a lot of it is still being imputed, both the challenges of trying to get the data plus in this world of the shutdown, who knows how reliable that information really is.
Not to mention, there was at least continued signs of tariff-based type inflation having an impact on the core goods, where the real saving grace, which is something we've been highlighting for really the last 15, 18 months, is the ongoing trend of lower owner's equivalent rent and there's been a lot of excess supply of rental properties and units that has been depressing rental inflation, which is a good thing. But that's really what offset what is still relatively sticky high inflation and at a time where the Fed is about to cut. The interesting thing with the dearth of data in this government shutdown window, we're still learning from other data sets, which we have looked at in the past as well.
These nontraditional alternative data sets do give us a glimpse of overall job activity without naming third-party vendors. There's a lot of still good data out there in the private sector side, which gives us a glimpse of what has continued to be like a split economy where upper income spending continues to drive most of the activity. The tech sector by and large is the one area of growth that continues to hold up the U.S. economy.
Those things continue and they're being clearly reflected in risk markets as well. I think the macro backdrop considering all these different competing forces, I think our basic assessment that it's still in an environment of deceleration for the old economy that the consumer is still tapped out. In the midst of the last couple of weeks while we've been traveling, there's been a number of headlines around credit concerns, around shadow banking type entities, which they call non-depository financial institutions, the NDFIs.
There are some pretty concerning ones too. Absolutely. That serves as a reminder for us that there are still some tensions out there in the real economy and that perhaps it's not as hunky-dory with consumer financing and consumer-based credit.
Just to follow up on that, what about the labor market? Today we got this sort of new release from ADP which said that private sector employers have added on average 14,250 jobs a week over the last four weeks. I was noticing in the details of the conference board's release today, it sort of looked like the labor differential kind of little changed at recent lows.
What's your assessment of the labor market specifically with again not a lot to work with? Those sort of sentiment indicators as well as ADP which I think we've mentioned in the last few podcasts used to get discounted, but it's what we have at the moment and plus it's good to see this weekly version being produced. But I just think in general, ADP is not as bad as some suggest and has been more in line with the reality on the ground of it's been a decelerating jobs market for the better part of again 15 to 18 months.
I think that that sort of run rate is still stall speed in my opinion. Anywhere between 25,000 to 50,000 jobs is nothing really to write home about for an economy as big as the U.S. with over 160 million workers and if we can't grow at 100,000 or more, I don't think it's a robust sign for the labor market regardless of population controls and things that are happening potentially on the immigration front, I still think that we can generate jobs well north of 100 if we were truly growing fast as being suggested and those sort of metrics like from the conference board as well as from the University of Michigan really point to a labor market that is concerned about the future and just future job prospects. Your point about this sort of these bankruptcies or frauds, that isn't positive for the labor market on a go forward basis either.
Let's get to the focus of the podcast or the focus of the episode rather, the Fed. We're recording this again on Tuesday, October 28th day which is day one of the Fed's October policy meeting when most of our listeners will be listening to this podcast, it will be the day of the Fed and we're going to get likely another 25 basis point cut in rate but I think the devil is kind of in the details there again and I believe if I'm not mistaken no economic forecast or steps, so the things the market is going to be looking at are the statement Powell's post-meeting press conference and perhaps some other stuff which I'll let you get into. You just published your FOMC preview, maybe you can go over the high points of that for benefit of our listeners.
This is a non-quarterly Fed meeting and so just taking it from the top, we're going to have the statement, yeah, considering again the lack of data, I'm sure that they're going to highlight that, that the best course of action is to be slow and steady and just to kind of take things one meeting at a time until we get back on track. So I expect to see something like that come through in the statement and I think it's really going to be the Q&A but before we get to the Q&A, the statement could also if they're going to make changes beyond rate cuts which again just to kind of make the base case clear, the markets are pricing in a 25 basis point cut. We think that they will deliver what the markets are basically priced in for, there's no need to do more, although you could argue they could do more but I don't think they want to surprise the markets in that channel.
So rate cut of 25, statement comes out. There's a risk that in the statement which is the official form of communication that they also change their balance sheet policy around quantitative tightening and we'll see that first. So that will come out at 2 o'clock.
If indeed they're about to change the quantitative tightening policy, they would have to release it in tandem with the official statement. It'll be probably embedded within it and then separately there will be another document with the actual procedures on the New York Fed's website. So that's typically how it works just operationally speaking.
We can get to the QT in a moment. Then we have the press conference at 2.30 which depending on if there is a change to the balance sheet policy, I'm sure a lot of folks will be around that as well as just what's going on without data and just sort of path and any sort of guidance that Chair Powell can kind of relay. But back to the QT, I do think given what's been happening with funding markets, especially around key dates, but even lately, even non-key dates, it's one thing during quarter end to see some funding pressures as the private balance sheets adjust into that sort of snapshot window.
But it's been throughout the month of October, we've seen – and after the Fed had cut rates too by the way. The Fed cut rates in September, got through quarter end and even then we've been seeing SOFR rates which is a collateralized form of borrowing against treasury or mortgage collateral. We've been seeing higher funding costs relative to the Fed funds rate and I think that's indications that we're getting to a point where reserves are getting scarce.
The RRP, the reverse repo program that the Fed has had in place to mop up liquidity has largely kind of basically run its course and now we're at a time where with the treasury ramping up T-bills as well as replenishing their TGA account, they're starting to kind of at least impact overall potentially bank liquidity throughout the financial system. And so I think that behooves the Fed to initiate an adjustment to quantitative tightening as you recall, I'm sure, John, like while we were traveling, Chair Powell had a speech a few weeks ago discussing the possibility that reserves are getting scarce and that maybe the balance sheet – Which was a surprise at the time. Exactly.
Yes and no. We know at some point eventually the Fed's balance sheet is going to have to stop shrinking but it was a surprise in terms of the timing of when he released that speech and it kind of teed up that at some point in the coming meetings, October or December, they're going to probably have to conclude the balance sheet reduction and the roll-off of treasuries and mortgages. And again, that also brings up some different possibilities.
It's possible that they do not end QT at this meeting, but the reason why we think they will is because time is of the essence. We're already entering into November. We have two months until year-end and it would behoove the Fed to kind of have like a sliding scale, slow down the QT and eventually end it before the end of the year just to kind of get ahead of addressing some of the potential year-end funding concerns.
What's the downside? I mean you don't want like another 2019 episode where markets like spike like crazy. Reserves are clearly on the lower end of the ample spectrum.
I just really kind of fail to see the downside in them getting going on that. Yeah, absolutely. So that's why we're forecasting that also taking place this week and then the question then comes down to composition, but we definitely encourage our listeners not to go into all the details here on the podcast.
Definitely go check out our piece which will go into more of the details around what is like plan A, plan B, plan C, how they could actually transition away from quantitative tightening and then maybe start to actually create a stable reserve environment like set some sort of floor of what should be the amount of reserves going forward for the financial system. It should be more dynamic. It shouldn't be so rigid.
So I think we're going to learn a lot, but we do think that the mortgage proceeds probably will get reinvested into treasuries and then the question then becomes how they do that either at the auctions or through open market operations. Maybe they run them in parallel. So there's definitely a lot of options and we explore those ideas in the piece.
Perfect. I like the plug, George. But to move things along, so we talked about the data or lack thereof.
We talked about the Fed. There's plenty going on outside of both those things on the macro front. President Trump, as example, is making his rounds across Asia.
Just had what appeared to be a very friendly meeting with the new Prime Minister of Japan, Takeichi, who I believe he called a very close friend. So all signs go to that meeting going particularly well. I believe he's scheduled to sit down with President Xi on the sidelines of the summit in South Korea, but I think there's a lot more going on there that you could probably enlighten us on.
Yeah, sure. Look, I mean, there's been a lot of tension. This is going to be either the third extension of U.S.-China trade negotiations.
If you recall, of course, we had April with the – well, actually March into April. There was a lot of pressure already on China with an escalation of tariff numbers that were just huge and just really didn't seem realistic at that time. But of course, it was market moving.
Then we had the extension until August, and then we had the extension until November, which is now basically – and President Trump and Xi are going to be spending time together hammering through this. Over the weekend, we got news and word from Treasury Secretary Besant that there's a framework now in place for how this deal will come together. We'll see.
The early reads or what was at least kind of like conveyed through the media is that there's going to be at least a one-year hiatus. I don't know. I feel like this is more like an opportunity for de-escalation.
I like to be proven wrong. The one-year hiatus is with regards to rare earths? Rare earths, yeah, correct.
Rare earths, okay. Yeah, and then the question is like, is the U.S. going to commiserate and also not have these really super elevated tariffs levels? Is there going to be renegotiation of the sort of earlier tariffs?
So, there's a lot of unknowns. I mean, so I feel like it's an opportunity to de-escalate at a minimum and at least buy more time and maybe we end up in this sort of like every three months, we're going to keep getting an update on how they're going to finalize. I'm not sure, personally speaking, that we're going to walk away with a grand deal at this juncture and the markets are kind of acting as if like the de-escalation is almost like the final deal.
So, I feel there's a potential for some letdown, but at the same time, I'd like to be proven wrong and maybe we do get a grand deal and that'll be great for overall. It's just kind of global geopolitics, but I think this is going to persist for much longer. Yeah, I mean, if I'm not mistaken, I think all three or four stock indices in the U.S. hit record highs yesterday and I know the Nikkei hit another record high.
So, yeah, just one measure of valuations, but certainly by that measure. And optimism too. Yeah, and optimism.
So, it certainly feels full from a valuation perspective and it certainly feels optimistic. So, as you alluded to a little bit earlier in the episode, you have some details in terms of the scenarios with which QT could end. So, I'd certainly encourage our listeners to check out the FOMC preview, which I believe you titled QT Out, Flexible Reserves In.
Is that right, George? That's right. Great.
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Thanks for hosting me. Thank you. And thank you for listening to the MEFG Global Markets Podcast.
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