The start of autumn season marks a turning point for the Federal Reserve. Our rate outlook is shifting accordingly.
As the Fed prepares to enter the second act of its rate-cutting cycle, uncertainty around the policy path is fading. The incoming dovish pivot, combined with closer coordination with the Treasury, has led us to revise our 10-year Treasury yield forecast: from a cautious 5% target to a 3.5–4.5% range over the next 12–18 months. This new rate environment, together with the resilience of the US economy supported by fiscal stimulus, strengthens the case for fixed income.
A Fed under Trump’s Influence
Traditionally independent, the Fed now faces pressure from President Trump, who seeks to align it with the administration’s priorities: lowering rates to reduce the $1tn annual debt-servicing cost (3.3% of GDP), boosting housing affordability and supporting growth. Trump has openly called for aggressive cuts, backed by Treasury Secretary Scott Bessent, who targets a 10-year yield closer to 3%.
In July, two Trump-appointed governors broke ranks in favour of deeper cuts - a rare dissent. Trump then nominated Stephan Miran, a vocal dove, to replace Adriana Kugler, and dismissed Governor Lisa Cook over alleged mortgage fraud. With that case still in court, Trump may soon fill another vacancy. He is also preparing to name Jerome Powell’s successor, with Chris Waller, Kevin Warsh and Kevin Hassett - all Powell critics and advocates of lower rates - among the frontrunners.
One of the key challenges in the months ahead will be Fed–Treasury collaboration to cap long-term yields. Tools under consideration include: tying the policy rate more closely to inflation (rather than holding it 1% above), halting quantitative tightening and reinvesting proceeds in long-dated Treasuries, adjusting the Supplementary Leverage Ratio (SLR) to stimulate demand for longer maturities, and potentially restarting quantitative easing to avoid a repeat of surge in the 10-year yield from 3.6% to 4.8% that followed the the 50bp cut in September 2024.
Rate scenario Revision
With the fed funds rate currently at 4.25–4.50%, markets assign a 97% probability of a 25bp cut at the September 17 meeting, following signs of labour-market weakness. We endorse this trajectory, which stands in contrast to the Fed’s stance earlier this year when it resisted loosening despite price pressures and the rapid imposition of record tariffs.
The direction is clear: Trump is tightening his grip on the Fed to secure lower rates. Our base case calls for two cuts in 2025 and four in 2026, bringing the policy rate into a 2.75–3.00% range. This assumes a soft landing and tariff-driven inflation easing to 2.5% by mid-2026.
At the start of the year, we projected a 10-year yield near 5%, with upside risks from fiscal slippage and ballooning public debt. We now see a 3.5–4.5% range over the next 12–18 months, versus 4.20% today, with a sustained overshoot relegated to tail-risk territory. This revision reflects expectations of a soft landing, contained inflation, Trump’s growing sway over the Fed and closer Fed–Treasury coordination. Energy markets add to this backdrop: oil prices should remain capped by Trump’s Middle East diplomacy, regulatory easing in the US and the prospect of a ceasefire in Ukraine.
However, risks remain: persistent inflation fueled by tariffs and deficits could push yields higher; conversely, a sharp downturn could widen spreads on rising uncertainty and defaults.
The opinions expressed herein are correct as at 4 September 2025 and are subject to change without notice. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
