If you spend any amount of time following the U.S. Federal Reserve, you learn the turns of phrase that policymakers like to rely on.
One such phrase that has been a hallmark of Fed Chair Jerome Powell’s tenure, during stretches of both raising and cutting interest rates, is: “policy is not on a preset course.” It has been employed as a gentle reminder for investors and markets that the Fed doesn’t know—or plan—what it is going to do at any given meeting, even if investors and markets are all but certain of what the Fed is going to do.
Prior to this week’s meeting, markets were pricing a near 100 percent chance that the Fed would cut rates again at the December meeting. Powell could have easily noted half-heartedly once again that “policy is not on a preset course” and got on with things.
He deliberately chose not to.
“… not a foregone conclusion—far from it”
That, in so many words, is how Powell characterized the chances of another rate cut in December. And with that statement, the markets now see the likelihood of a December rate cut as below a 70 percent probability, while prospects for future cuts into 2026 have also dimmed.
The Fed, as widely expected, cut rates for a second consecutive meeting to a target range of 3.75 percent to 4.00 percent. But as we noted after the Fed’s September meeting, which featured updated interest rate projections (this meeting did not), even though the median forecast suggested rate cuts to 3.50 percent to 3.75 percent by the end of the year, the median only masked the fact that there were two growing factions at the Fed—the hawks who saw no more rate cuts this year, and the doves who saw multiple.
We think the hawks both have the edge, and a better case to be made.
Where do interest rates go from here?
Source - RBC Wealth Management, Bloomberg, RBC Capital Markets forecasts as of October 2025; market pricing based on federal funds futures
The line chart shows the path of the federal funds rate since June 2024 from 5.50% to a current upper bound of 4.00%. RBC Capital Markets forecasts no further rate cuts this year, but two more 25 basis point cuts in 2026 to an upper bound of 3.50%. Markets continue to expect the Fed to cut closer to 3.00% next year. The range of forecasts from the Bloomberg Consensus Survey of Analysts for future rate cuts are also shown; the ranges get larger as they go further into the future, from 3.50%¬–4.00% in December 2025 to 2.25%–4.00% in December 2026.
Risk management goes both ways
With another rate cut this week, the Fed has taken out even more insurance against the risk of further labor market cooling. And early signs already point to labor market stability.
This week, payroll processor ADP announced what will be a new weekly index of hiring activity, with the first report noting that: “For the four weeks ending Oct. 11, 2025, the National Employment Report pulse shows that private employers added an average of 14,250 jobs per week. This growth in employment suggests that the U.S. economy is emerging from its recent trough of job losses.”
Consumer data also released this week showed just 18 percent of those surveyed viewed jobs as “hard to get” in October. That is off the record lows seen in prior years, but largely unchanged since May and still below what could be deemed as “normal,” and far below levels seen during and after past recessions.
Labor market still cooling, but is it cold?
Percentage of U.S. consumers reporting jobs are “hard to get”
Source - RBC Wealth Management, Bloomberg, Conference Board Consumer Survey
The line chart shows the percentage of consumers responding to a monthly survey by the Conference Board who viewed jobs as "hard to get" from 1970 through October 2025. In October, roughly 18% held that view; the proportion has been generally increasing since mid-2022 but remains below the long-term average of 25%.
So, if the labor market is already stabilizing, and has scope to play out a repeat of last year—when the Fed’s brief rate cut cycle sparked a notable uptick in hiring—then we think the Fed’s focus may shift back to the inflation side of the mandate.
On that basis, we believe the Fed would be prudent to hold rates steady into 2026.
Driving in the fog
Another quotable quote from Powell this week was this: “What do you do if you are driving in the fog? Slow down ... again, I am not committing to that, but I am saying it is certainly a possibility that you would say, we really can’t see, so let’s slow down.”
It was uncertain how the Fed might approach the ongoing government shutdown and the subsequent lack of economic data. Would policymakers proceed with rate cuts on the idea that it’s better to be safe than sorry?
Now we have an answer. Not only is it likely that the shutdown will last well into November, in our opinion, it will take months beyond that for any noise in the data to fade. Absent a marked downturn in labor market activity gleaned from various anecdotal data sources, we believe the Fed will likely err on the side of doing too little, rather than too much.
With rates now below four percent, and ever closer to the Fed’s estimated three percent “neutral” rate for the economy, cutting rates into an economy that could ultimately prove to be stronger than the Fed might expect—a running theme in recent years—would only stoke further inflationary pressures, in our view.
Is the Fed now just a background character?
While we maintain our view that the Fed will cut more slowly, and ultimately to a higher terminal level, we now see that as less of a risk for markets broadly.
Our biggest concern with respect to risk assets was what we viewed as overly aggressive rate cut expectations on the part of traders paired with record highs for many stock market indexes and historically tight credit spreads in corporate bond markets.
Now that the gap has been narrowed, the muted reaction this week from risky assets such as equities and corporate bonds suggests that markets might be content with where the Fed stands. Rates have already been cut by 150 basis points over the past 13 months, with policymakers still at the ready to do more if needed.
The main character is now clearly AI, starring in a show about capital spending, strong earnings, and ever-higher valuations. The Fed is just a subplot.