The Focus This Week: Investors’ Certainty Expires After This Month
The Fed’s chairman opened the door for a September rate cut a few weeks back. At the time, plenty of folks dismissed it as a nod to the US president’s (loud) calls for easier policy. But the stats have supported the Fed’s premonition: inflation stayed steady (even with tariffs in play), while the labour market weakened. Remember, the Fed’s tasked with keeping inflation steady and employment to the max – and the latter is posing a bigger risk, at least for now.
That suggests rate cuts. And investors agree they’re pricing in a more than 90% chance of a 25-basis point cut next week – and two more before the year’s out. Still, today’s near-certainty could be tomorrow’s mispricing.
See, tariffs or an economic uptick could send prices higher, or geopolitics could rattle supply chains and energy markets. That could persuade the Fed to avoid any further rate cuts after September. Or, on the flip side, a bigger-than-feared economic lag could force the Fed to cut more aggressively.
Traders aren’t just torn about the following rate cuts. They’re split between two opposing views of the economy, too. Some investors believe the worst is over and the economies on the road to recovery. Their proof points: companies improving their outlooks, a wider spread of fortunes across both small and big companies, resilient corporate balance sheets, and improving investor sentiment. On top of that, there’s the prospect of AI-fuelled productivity and the potential for cheaper borrowing costs.
On the contrary, some traders are taking weak jobs data, stretched consumers, eye-watering stock valuations, and a soft housing market as warning signs. (Historically, they have been reliable indicators of economic slowdowns.) Add in inflationary risks from tariffs and government policies, and they’re sceptical of the Fed’s ability to cushion a downturn.
The Fed’s next move could influence the short-term mood, but it won’t settle the bigger debate. Just remember this: rate cuts are always good for stocks on paper – but markets will only rally if economic growth and company earnings hold up. History shows that when cuts are designed to prevent a recession, the resulting returns are worse than in a steadier climate. So, watch the data, stay flexible, and remember that a rate cut would be one step in a much bigger cycle.
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