Premium Playbook - Aug 29th, 2025
Market Scenarios for Q4: Positioning Amid Fed Uncertainty
Entering the fourth quarter of 2025, financial markets continue to focus on the Federal Reserve's potential path and possible interest rate cuts. There is one overriding question: how far, and how fast, will the Fed move on rates? Are market participants underestimating the cautious approach to monetary easing.
This Playbook outlines the three dominant market scenarios for Q4 and how to position across rates, FX, and risk assets.
Macro Backdrop
Growth: The U.S. economy continues to outperform expectations, with GDP growth tracking above its long-term average, driven by steady business investment and resilient labor markets. However, cracks are starting to show—consumer spending, a key engine of growth, is losing steam as households grapple with higher costs and tighter budgets. Retail sales data suggests a slowdown in discretionary purchases, particularly in big-ticket items like appliances and vehicles, signaling potential headwinds for Q4.
Inflation: While headline inflation has cooled from its peaks, the details tell a stickier story. Core inflation, especially in services like healthcare and dining, and shelter costs like rent and home prices, remains stubbornly high. This persistence is muddying the waters for the Federal Reserve, as it balances the need to curb inflation without choking off growth. Recent CPI reports show services inflation hovering around 4%, well above the Fed’s 2% target, creating a delicate challenge for policymakers.
Policy: Federal Reserve Chair Jerome Powell continues to stress a “data-dependent” approach, keeping markets on edge about whether rate cuts will materialize in September or December. The Fed’s recent minutes reveal a split among members, with some favoring immediate easing and others wary of premature moves given inflation’s tenacity. This uncertainty leaves the odds of policy shifts finely balanced, with markets pricing in a 50-50 chance of a cut at either meeting, depending on incoming economic data.
Global Context: Across the Atlantic, the European Central Bank and Bank of England are moving more cautiously than the Fed, with both still early in their easing cycles due to weaker growth and less intense inflation pressures. Meanwhile, Japan’s Bank of Japan is grappling with a volatile yen, driven by interest rate differentials and speculative flows. The yen’s fluctuations are creating headaches for exporters and adding uncertainty to global currency markets, with ripple effects for U.S. investors holding foreign assets.
Three Market Scenarios for Q4
Base Case: Gradual Easing, Volatility in Yields
Fed delivers one cut by year-end, signaling caution on inflation.
Yield curve steepens modestly as front-end pricing adjusts.
Hawkish Delay: Sticky Inflation Forces Pause
Inflation surprises to the upside, delaying easing into 2026.
Risk assets face repricing: equities correct, USD strengthens, yields stay elevated.
Dovish Surprise: Growth Cracks Force Aggressive Cuts
Labour market rolls over sharply, consumer retrenches.
Fed cuts twice by December, curve bull-steepens.
Positioning Effects & Strategy Takeaways
Stay Duration-Selective: 5–10yr Treasuries offer the best convexity into year-end.
USD Bias: Maintain core USD long positions, but hedge tail-risk with JPY exposure.
Equities: Bias toward quality balance sheets in base case, but be ready to rotate into cyclicals on dovish surprise.
Risk Management: Expect higher yield volatility; options hedges on USTs and FX are an option if you have the ability.
Final Note
Q4 will not be about whether the Fed cuts, but about how the sequencing interacts with inflation stickiness. Positioning amid this uncertainty requires balance: lean defensive, but stay ready to pivot if the Fed shifts gears more dramatically than priced.
For a deeper dive into the structural tug-of-war between policy easing and inflation risks, revisit our earlier feature:
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