The outlook for Federal Reserve rate cuts stays uncertain as markets weigh inflation and jobs

Interest Rate Cut Expectations Become Consensus

After Powell hinted at potential policy adjustments at the Jackson Hole conference, financial markets reacted swiftly: US stocks experienced a short-term surge, and US Treasury yields fell significantly. Investors generally believe that the Federal Reserve will announce a 25-basis-point cut to the federal funds rate at the policy meeting on September 17. According to CME Group's "FedWatch Tool," the probability of a rate cut has risen to 82%, significantly higher than a month ago.

However, with Monday's market pullback, investors began to reflect calmly on whether the Fed will continue its easing path after September and if the rate cut can truly improve the economic environment.

Market Questions Rate Cut Pace

Jason Granet, Chief Investment Officer at BNY Mellon, bluntly stated that Powell only "opened a crack for a rate cut" without sending a strong signal for rapid easing. He believes the Fed may take a gradual approach rather than consecutive, substantial rate cuts.

Trading data shows the market believes the probability of another rate cut in October is only 42%, and the likelihood of three cuts in total this year is less than one-third. In other words, there is significant uncertainty about the policy path after September.

Inflation and Political Pressure as Key Factors

Analysts point out that the core variables hindering the Fed's rapid rate cuts are mainly twofold: firstly, the inflationary risk from tariff policies, and secondly, the resilience of the US economy, which has not yet shown signs of recession.

Lisa Shalett, Chief Investment Officer at Morgan Stanley, even claims there is currently no compelling reason for an urgent rate cut. She notes that the Fed faces immense political pressure, yet the overall condition of the labor market remains stable. She also questions whether a rate cut will effectively boost the stock market, as major economic sectors' sensitivity to interest rates has significantly decreased.

Historical Experience Raises Concerns

Some market observers are worried about a repeat of the scenario in 2024. At that time, after the Fed cut rates by 100 basis points, Treasury yields unexpectedly rose, and mortgage rates climbed in tandem, significantly undermining the policy's effectiveness.

Ed Yardeni, head of Yardeni Research, warns that the Fed might again underestimate the inflation shock caused by tariffs. He reminds the market that if yields climb in reverse, it could weaken the White House's goals of reducing financing costs and stimulating the real estate market through rate cuts.

Stock Market May Still Benefit

Despite concerns, some institutions remain optimistic about the stock market outlook. Yardeni predicts the S&P 500 Index still has about 2% upside for the year and could finish around 6600 points by year-end. He believes that even if the Fed makes mistakes in its policy pace, corporate profit growth remains the fundamental driver of the stock market's rise.

Strategists from Lombard Odier pointed out that the Fed's pivot has at least removed one major uncertainty for the market. Investors now have "one less enemy," potentially creating space for asset valuations.

Outlook

The market is almost certain the Fed will take rate-cutting action in September, but this is just the beginning of the easing cycle, not the end. The future policy path may be influenced by economic data, inflation trends, and political interventions. For investors, the true test might not be the September meeting itself, but whether the Fed can balance the dual pressures of the economy and inflation during the rest of the year.

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.