Fed Decision Nears As Markets Bet On Jerome Powell Holding The Line At October Meeting

• According to the FedWatch Tool, which is based on futures traders’ expectations, the odds of a quarter-point cut are 97.8%, and the odds of a pause decision are 2.2%.
• Updated forecasts or the dot-plot curve would not accompany the October post-meeting policy statement.
• A Morgan Stanley economist expects the Fed to announce the end of quantitative easing by January, with balance sheet normalization beginning in February.

The 12-member Federal Open Market Committee (FOMC) — the rate-setting committee of the Federal Reserve — is all set for its penultimate meeting of the year that kicks off on Tuesday. Traders, as well as the prediction markets, have factored in another 25-basis-point (bps) cut following the end of the two-day meeting.

One of the key drivers of the market’s broader uptrend since April’s tariffs-driven lows has been expectations that the central bank will deliver successive rate cuts, taking the Fed funds rate to a more neutral level.

The SPDR S&P 500 ETF (SPY), an exchange-traded fund that tracks the S&P 500 Index, and the Invesco QQQ Trust (QQQ) ETF trade in record territory, having gained 18% and 23%, respectively, year to date.

On Stocktwits, sentiment toward the SPY ETF remained ‘bearish’ heading into Tuesday’s session. The QQQ ETF elicited a ‘bearish’ sentiment among retailers, a deterioration from the ‘neutral’ sentiment seen a day ago. The message volume on the SPY stream remained ‘normal,’ while that for the QQQ stream ticked up to ‘high’ levels.

Following the quarter-point cut in September, the benchmark interest rate at which banks and credit unions lend and borrow reserve balances overnight stands at 4%-4.25%. The key rate influences short-term rates, thereby indirectly affecting mortgage rates.

What The Market Expects From Fed

According to the FedWatch Tool, which is based on futures traders’ expectations, the odds of a quarter-point cut are 97.8%, and for a pause decision, 2.2%.

The October post-meeting policy statement would not be accompanied by updated forecasts (Summary of Economic Projections) or the dot-plot curve. Still, Powell would explain the rationale behind the rate move and discuss the outlook at a press conference scheduled for 2:30 p.m. ET on Wednesday.

According to Polymarket, a prediction market, about 98.2% braced for a 25bps reduction, 1% bet on a status quo decision, and less than a percent expected a 50bps reduction. Meanwhile, Kalshi’s survey found that 97% are positioned for a quarter-point cut, and 2% each expect a pause and a hike of more than 25 bps.

Retail Position For Small Moves

An ongoing Stocktwits poll, powered by Polymarket, found that 61% of the platform's retail users expect a 25 bps cut, 19% bet on a 50 bps or higher cut, and 20% see the Fed holding fire. The poll has received responses from 43,000 users so far.

Some of them who argued against rate cuts questioned the logic of any move in the absence of meaningful data due to the government shutdown. Others expect a steady pace of cuts.

In a note released Monday, Morgan Stanley Chief U.S. Economist Michael Gapen said limited data availability should not stop the Fed from reducing its policy rate again in October and signaling another cut is likely in December. “But it could limit how far rate guidance extends past year-end,” he said.

The economist expects the target rate to be reduced by 25 bps to 3.75%-4% at the October meeting and the Fed to retain an easing bias. He also sees the Fed announcing an end to its quantitative easing by January, with the balance sheet normalization beginning in February.

For updates and corrections, email newsroom[at]stocktwits[dot]com.

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