{"id":42902,"date":"2025-08-26T11:35:06","date_gmt":"2025-08-26T11:35:06","guid":{"rendered":"https:\/\/quickassetsmarket.com\/index.php\/2025\/08\/26\/the-coming-fed-pivot-what-it-means-for-markets-now\/"},"modified":"2025-08-26T11:35:06","modified_gmt":"2025-08-26T11:35:06","slug":"the-coming-fed-pivot-what-it-means-for-markets-now","status":"publish","type":"post","link":"https:\/\/quickassetsmarket.com\/index.php\/2025\/08\/26\/the-coming-fed-pivot-what-it-means-for-markets-now\/","title":{"rendered":"The coming Fed pivot: what it means for markets now"},"content":{"rendered":"
<\/div>\n

The Federal Reserve is edging closer to another rate cutting cycle. The last time the benchmark interest rate was reduced was in December 2024.<\/p>\n

After two years of fighting inflation with aggressive hikes, Chair Jerome Powell indicated in Jackson Hole that the \u201cbalance of risks\u201d is changing.<\/p>\n

Inflation risks<\/a> are still there, and the labor market<\/a> is weakening. <\/p>\n

Investors are betting heavily that the Fed will move in September. Major banks and brokerages are adjusting their bets as well.<\/p>\n

But should everyone remain bullish on rate cuts? History suggests yes, but things are different this time around.<\/p>\n

Where policy stands today<\/h2>\n

The federal funds rate is currently pinned at 4.25\u20134.50 percent, approximately one full percentage point down from its peak in Q3 2024. <\/p>\n

At the July meeting, two Fed governors broke ranks and voted for a cut, the first open dissent in this direction during the cycle. <\/p>\n

Minutes from that meeting<\/a> described policy as \u201cmoderately restrictive,\u201d with officials weighing the tug-of-war between tariff-driven price pressures and rising downside risks to employment.<\/p>\n

Powell\u2019s Jackson Hole speech<\/a> was a big confirmation signal for investors. <\/p>\n

His language suggested the Committee is preparing to ease, though incoming data will dictate the pace.<\/p>\n

The Fed\u2019s next decision is on September 17, and futures markets<\/a> assign an 85% probability to a 25 basis point cut, with roughly 50 basis points of easing priced by year-end. <\/p>\n

Goldman Sachs, JPMorgan, Barclays and Deutsche Bank have all shifted their forecasts<\/a> to expect a September move. <\/p>\n

Morgan Stanley is the latest player to join<\/a> the bullish predictions, forecasting two 25-point cuts for 2025, with a long-term rate projection of 2.75-3.0%.<\/p>\n

The data that moved the Fed<\/h2>\n

July\u2019s inflation numbers showed headline CPI at 2.7% year on year and core at 3.1%. <\/p>\n

Services inflation continues to cool, but tariffs are lifting goods prices. The Fed\u2019s preferred measure, core PCE, stood at 2.8% in June. <\/p>\n

Source: Bloomberg<\/a><\/figcaption><\/figure>\n

The July reading will be released on August 29 and is crucial for confirming whether disinflation is intact.<\/p>\n

The labour market is where the Fed\u2019s attention has turned. Payrolls grew just 73,000 in July, with downward revisions to prior months.<\/p>\n

The unemployment rate rose to 4.2%, while job openings fell to 7.4 million. <\/p>\n

The softness is concentrated outside healthcare, suggesting broadening weakness. <\/p>\n

Powell explicitly acknowledged in Jackson Hole that downside risks to jobs are rising, a subtle but important change in tone.<\/p>\n

A relatively contained inflation level, but a weakening job market mix has opened the door to a cut.<\/p>\n

But the Fed is not promising a series. It is positioning itself to begin easing and then proceed cautiously, meeting by meeting. <\/p>\n

This has been Jerome Powell’s playbook ever since he became chairman of the Federal Reserve.<\/p>\n

How markets are reading it<\/h2>\n

Bond markets are the first to respond. 2Y Treasury yields fell after Powell\u2019s speech, pricing in a September cut. <\/p>\n

Futures imply around half a percentage point of easing this year, consistent with the Street view. <\/p>\n

Equity markets have interpreted the pivot as supportive. Small and mid-cap stocks, which are more sensitive to financing costs and yield curve shifts, have begun to outperform.<\/p>\n

The risk now is less about direction and more about pace. <\/p>\n

If PCE comes in hot or August jobs rebound sharply, the Fed could hold steady in September and push the first cut to November or December.<\/p>\n

In that case, front-end yields would retrace higher, and equities could lose momentum.<\/p>\n

Conversely, if unemployment spikes past 4.5% or payrolls turn negative, the Fed could be forced into faster and larger cuts. <\/p>\n

That would support Treasuries but would likely come with equity volatility and wider credit spreads.<\/p>\n

Markets are pricing the base case, which is a September \u201cfine-tuning\u201d cut, with the option of another in December. <\/p>\n

The scenario tree branches from there.<\/p>\n

What history tells us about cuts<\/h2>\n

History shows that markets behave very differently depending on whether cuts are insurance or recession-driven.<\/p>\n

Since 1970, the S&P 500 has gained<\/a> on average between 6-16% in the year following the first cut. <\/p>\n

In cycles where cuts were made without a recession, equities returned closer to 18%. <\/p>\n

When the economy was already in recession, the average return dropped to around 5%. <\/p>\n

Source: Northern Trust<\/a><\/figcaption><\/figure>\n

Important to note that research from Reuters <\/a>found that the S&P 500 typically declines in the months leading up to rate cuts.<\/p>\n

Small caps have historically outperformed large caps in the first year after cuts, reflecting their greater sensitivity to borrowing costs.<\/p>\n

The yield curve usually steepens. Front-end yields fall faster than long yields, producing a bull steepener. <\/p>\n

This tends to support financials and cyclicals when growth is intact. In recession cuts, long-duration Treasuries perform best, equities struggle, and credit spreads widen.<\/p>\n

The average hides the dispersion. The key question is whether the September cut is an insurance move or the start of a recession cycle. <\/p>\n

That’s why key upcoming macro data will be crucial.<\/p>\n

What investors should watch and why<\/h2>\n

The playbook is straightforward. Watch core PCE for signs of whether tariffs are feeding through to sustained inflation. <\/p>\n

Focus on payrolls, revisions and the unemployment rate for evidence of labour market cracks.<\/p>\n

Pay attention to Powell\u2019s language in speeches and minutes about \u201cbalanced risks.\u201d <\/p>\n

FedWatch probabilities<\/a> can be used to gauge whether cuts are already fully priced.<\/p>\n

If the Fed delivers a fine-tuning cut with growth still intact, investors should expect a constructive backdrop. <\/p>\n

Small and mid-caps can lead, breadth should improve, and investment-grade credit carry remains attractive. <\/p>\n

If data re-accelerate and force the Fed to hold, equities could grind, but leadership will skew back to quality growth.<\/p>\n

If labour cracks sharply, the defensive recession template applies: long Treasuries, quality equities, and higher-grade credit outperform.<\/p>\n

The Fed pivot is near. What happens after it depends less on the cut itself and more on the regime it signals. <\/p>\n

History shows markets can rally strongly after insurance cuts. <\/p>\n

But history also shows that when cuts arrive too late, volatility replaces relief. <\/p>\n

Investors now face the task of deciding which side of history this cycle will follow.<\/p>\n<\/p>\n

The post The coming Fed pivot: what it means for markets now<\/a> appeared first on Invezz<\/a><\/p>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

The Federal Reserve is edging closer to another rate cutting cycle. The last time the benchmark interest rate was reduced was in December 2024. After two years of fighting inflation with aggressive hikes, Chair Jerome Powell indicated in Jackson Hole that the \u201cbalance of risks\u201d is changing. Inflation risks are still there, and the labor <\/p>\n","protected":false},"author":1,"featured_media":42903,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[],"class_list":{"0":"post-42902","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-investing"},"_links":{"self":[{"href":"https:\/\/quickassetsmarket.com\/index.php\/wp-json\/wp\/v2\/posts\/42902","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/quickassetsmarket.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/quickassetsmarket.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/quickassetsmarket.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/quickassetsmarket.com\/index.php\/wp-json\/wp\/v2\/comments?post=42902"}],"version-history":[{"count":0,"href":"https:\/\/quickassetsmarket.com\/index.php\/wp-json\/wp\/v2\/posts\/42902\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/quickassetsmarket.com\/index.php\/wp-json\/wp\/v2\/media\/42903"}],"wp:attachment":[{"href":"https:\/\/quickassetsmarket.com\/index.php\/wp-json\/wp\/v2\/media?parent=42902"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/quickassetsmarket.com\/index.php\/wp-json\/wp\/v2\/categories?post=42902"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/quickassetsmarket.com\/index.php\/wp-json\/wp\/v2\/tags?post=42902"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}