Finance
Fed has a rate cut plus a bunch of other things on its plate this week
Jerome Powell, chairman of the US Federal Reserve, during the International Monetary Fund (IMF) and World Bank Fall meetings at the IMF headquarters in Washington, DC, US, on Thursday, Oct. 16, 2025.
Kent Nishimura | Bloomberg | Getty Images
The easy part for the Federal Reserve on Wednesday will be announcing an interest rate cut when it wraps up its two-day policy meeting. The hard part will be taking care of other details that are presenting substantial challenges to policymaking these days.
Markets are assigning a nearly 100% probability that the Federal Open Market Committee will approve a second consecutive quarter percentage point, or 25 basis point, reduction in the federal funds rate. The overnight lending benchmark is currently targeted between 4%-4.25%.
Beyond that, policymakers are likely to debate, among other things, the future path of reductions, the challenges posed by a lack of economic data and the timetable for ending the reduction in its asset portfolio of Treasurys and mortgage-backed securities.
Underlining all of those deliberations will be a growing divergence of opinion over what the future holds for monetary policy.
“They are at a moment in the policy cycle where there’s genuine disagreement between people who are thinking we will probably cut rates but I’m not ready to cut again just yet, and people who think even though there’s risks, it’s time to do more now,” said Bill English, a Yale professor and the Fed’s former director of monetary affairs. “There’s dissent between people who want to cut now, and people who want to wait and see a bit more.”
Judging by recent statements and prevailing Wall Street sentiment, newly appointed Governor Stephen Miran is likely to dissent in favor of a bigger cut, as he did at the September FOMC meeting.
At the same time, regional Presidents Beth Hammack of Cleveland, Lorie Logan of Dallas and Jeffrey Schmid of St. Louis have expressed reluctance to go much further on cuts, though it’s far from clear whether they will vote against a cut this week. Only Miran, who wanted a half-point reduction, actually dissented in what was an 11-1 committee vote last month to cut by a quarter point.
Left to try to straddle the difference will be Chair Jerome Powell, who in a recent speech gave an implied nod to an October cut when he expressed worry over the state of the labor market.
Investors will look to the central bank chief, who will leave the position in May 2026, for guidance on the prevailing sentiment.
“I would expect him to try to walk a middle ground, not tip his hand necessarily, on December,” English said, referring to the next policy meeting after this one. “I don’t think he wants to be locked into a rate cut in December. But on the other hand, it does seem like he’s worried about the labor market and about the outlook for real activity, so he doesn’t want to come across as hawkish.”
Markets currently also are pricing in a near-certainty of a December reduction, according to the CME Group’s FedWatch tool, so it would take a lot do dissuade Wall Street from anticipating more Fed easing.
Worries about jobs
One big reason officials are in the mood to lower is concern over the labor market. Even with an absence of data, there are clear signs that inflation is slowing even if layoffs, judging by state-level jobless claims submissions that are still ongoing despite the federal shutdown, do not appear to be accelerating.
In fact, worries over jobs could keep the Fed cutting well into 2026, said Luke Tilley, chief economist at Wilmington Trust.
“We expect 25 [basis points Wednesday] and then again in December, and then again in January and March and April,” Tilley said. “Then that would bring them down to what we think of as the neutral range to 2.75% to 3%.”
Fed officials in September indicated, through the “dot plot” of individual members’ expectations, that they won’t get to a rate that neither pushes nor restrains growth — the so-called “neutral” rate — until 2027, and even then it will be a quarter point above where Tilley sees.
However, he thinks the Fed won’t have any choice but to react to labor market weakness, particularly as it poses a challenge to surprisingly strong economic growth seen in the second half of this year.
Worries over jobs have taken more of the Fed’s focus even as inflation remains well above the central bank’s 2% target. The Bureau of Labor Statistics reported last week, in the only official data release during the shutdown, that the annual inflation rate as measured by the consumer price index was stuck at 3% in September.
Lack of data challenge
Outside of the CPI report, central bankers face the additional challenge of the data blackout that has accompanied the government shutdown.
“It’s hard to make policy to achieve two goals … when you’re not getting data about about at least one of them,” Tilley said, referring to the Fed’s dual mandate to maximize employment and keep prices stable, and the absence of the September nonfarm payrolls report due to the shutdown.
“I expect that to be communicated as more uncertainty about the path forward, that they have to be ready to pivot and hold rates, if need be, or to reduce them faster when they finally do get data,” Tilley said.
Finally, markets will be looking for more definitive answers on when the Fed will stop reducing its $6.6 trillion balance sheet, most of which is in Treasurys and mortgage-backed securities. Nicknamed quantitative tightening, or QT, the process has entailed allowing proceeds from maturing securities to roll off rather than being reinvested as usual.
In a recent speech, Powell indicated the time is getting closer to where the Fed will want to stop QT. While financial conditions are largely still solid, there have been some small signs lately that short-term markets are tightening up. With the Fed’s overnight funding facility nearly drained, officials are likely to signal this week that QT is in its final stages.
Market commentary was split over whether the Fed will announce the actual end of the program, or signal a future date when it will cease.
“There are signs that they’re getting close to bottom, so to speak, in terms of getting through ample reserves and actually getting some tightness and liquidity. So that’s why I would expect an announcement, if not action,” Tilley said.
Cybersecurity and enterprise software stocks have been market dogs in 2026, with fears that AI will wipe out a wide range of companies in the enterprise space dominating the narrative. But they snapped a brutal losing streak this past week, joining in the broader market rally that saw all losses from the U.S.-Iran war regained by the Dow Jones Industrial Average and S&P 500.
Cybersecurity has been “a victim of some of the AI-related headlines,” Christian Magoon, Amplify ETFs CEO, said on this week’s “ETF Edge.”
It wasn’t just niche cybersecurity names. Take Microsoft, for example, which was recently down close to 20% for the year. Its shares surged last week by 13%.
A big driver of the pummeling in software stocks was a rotation within tech by investors to AI infrastructure and semiconductors and some other names in large-cap tech, Magoon said, and since cybersecurity stocks and ETFs are heavily weighted towards software companies, they were left behind even as those businesses continue to grow on a fundamental basis.
But Wall Street now has become more bullish with the stocks at lower levels. Brent Thill, Jefferies tech analyst, said last week that the worst may be over for software stocks. “I think that this concept that software is dead, and then Anthropic and OpenAI are going to kill the entire industry, is just over-exaggerated,” he said on CNBC’s “Money Movers” on Wednesday.
“Big Short” investor Michael Burry wrote in a Substack post on Wednesday that he is becoming bullish about software stocks after the recent selloff. “Software stocks remain interesting because of accelerated extreme declines last week arising from a reflexive positive feedback loop between falling software stocks and changes in the market for their bank debt,” he wrote.
The Global X Cybersecurity ETF (BUG), is down about 12% since the beginning of the year, with top holdings including Palo Alto Networks, Fortinet, Akamai Technologies and CrowdStrike. But BUG was up 12% last week. The First Trust NASDAQ Cybersecurity ETF (CIBR) is down 6% for the year, but up 9% in the past week.
Piper Sandler analyst Rob Owens reiterated an “overweight” rating on Palo Alto Networks which helped the stock pop 7% — it is now down roughly 6% on the year. Its peers saw similar moves, including CrowdStrike.
Performance of Global X cybersecurity ETF versus S&P 500 over past one-year period.
Magoon said expectations may have become too high in cybersecurity, and with a crowding effect among investors, solid results were not enough to to push stocks higher. But the down-and-then-back-up 2026 for the sector is also a reminder that when stocks fall sharply in a short period of time, opportunity may knock.
“Once you’re down over 10% in some of these subsectors, you start to see the contrarians start to say, ‘well, maybe I’ll take a look at this,'” Magoon said.
He said AI does add both opportunity and uncertainty to the cybersecurity equation, increasing demand but also introducing new competition. But he added, “I think the dip is good to buy in an AI-driven world,” specifically because the risks to companies may lead to more M&A in cyber names that benefits the stocks.
For now, investors may look for opportunity on the margins rather than rush back into beaten-up tech names. “I think investors are still going to remain underweight software,” Thill said.
But Magoon advises investors to at least take the reminder to keep an eye on niches in the market during pronounced downturns. “The best-performing are often the least bought and do the best over the next 12 months versus late-in-the-game piling on,” he said.
While that may have been a mindset that worked against the last investors into cybersecurity and enterprise software in mid-2025 when the negative sentiment started building, at least for now, it’s started working for the stocks in the sector again.
Meanwhile, this year’s biggest winner is also a good example of what can be an extended trade in either a bullish or bearish direction. Last year, institutional ownership of energy was at multi-year lows, Magoon said, referencing Bank of America data. “Reverse sentiment can be a great indicator,” he said.
But he cautioned that any selective buying of stocks that have dipped does have to contend with the risk that there is a potentially bigger drawdown in the market yet to come in 2026. That is because midterm election years historically have been marked by large drawdowns. “If you think it is bad right now, it could get a lot worse,” Magoon said. But he added that there’s a silver-lining in that data, too, for the patient investor. The market has posted very strong 12-month returns after midterm election drawdowns end. So, for investors with a longer-term time horizon and no need for short-term liquidity, Magoon said, “stick in there.”
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New innovation in the exchange-traded fund industry could come at a cost to investors during extreme conditions.
According to MFS Investment Management’s Jamie Harrison, ETFs involved in increasingly complex derivatives and less transparent markets may be in uncharted territory when it comes to violent downturns.
“Those would be something that you’d want to keep an eye on as volatility ramps up,” the firm’s head of ETF capital markets told CNBC’s “ETF Edge” this week. “As innovation continues to increase at a rapid pace within the ETF wrapper, [it’s] definitely something that we advise our clients to be really front-footed about… Lack of transparency could absolutely be an issue if we’re going to start seeing some deep sell-offs.”
His firm has been around since 1924 and is known for inventing the open-end mutual fund. Last year, ETF.com named MFS Investment Management as the best new ETF issuer.
“It’s important to do due diligence on the portfolio,” he said. “Having a firm that has deep partnerships, deep bench of subject matter experts that plays with the A-team in terms of the Street and liquidity providers available [are] super important.”
Liquidity as the real issue?
Harrison suggested the real issue is liquidity, particularly during a steep sell-off.
“We’ve all seen the news and the headlines around potential private credit ETFs. That picture becomes much more murky,” he added. “It’s up to advisors, to investors [and] to clients to really dig in and look under the hood and engage with their issuers.”
He noted investors will have to ask some tough questions.
“What does this look like in a 20% drawdown? How does this liquidity facility work? Am I going to be able to get in? Am I going to be able to get out? And if I’m able to get out, am I able to get out at a price that’s tight to NAV [net asset value], and what’s the infrastructure at your shop in terms of managing that consideration for me,” said Harrison.
Amplify ETFs’ Christian Magoon is also concerned about these newer ETF strategies could weather a monster drawdown. He listed private credit as a red flag.
“If your ETF owns private credit, I think it’s worth taking a look at, kind of what the standards are around liquidity and how that ETF is trading, because that should be a bit of a mismatch between the trading pace of ETFs and the underlying asset,” the firm’s CEO said in the same interview.
Magoon also highlighted potential issues surrounding equity-linked notes. The notes provide fixed income security while offering potentially higher returns linked to stocks or equity indexes.
“Those could potentially be in stress due to redemptions and the underlying credit risk. That’s another kind of unique derivative,” Magoon said. “I would very closely look at any ETF that has equity-linked notes should we get into a major drawdown or there be a contagion in private credit or something related to the banking system.”
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