WASHINGTON: A key question for investors this week is whether Federal Reserve (Fed) officials push back against market bets on a series of interest-rate cuts extending into next year.
A quarter-point reduction is seen as a sure thing when the Fed announces its policy decision tomorrow, with a small potential for a half-point move amid signs US job growth is slowing rapidly.
But markets have also priced in reductions continuing deep into 2026 to ward off a recession.
That assumption has driven Treasury yields to the lowest in months, propelled US stocks to record highs and undermined the dollar.
The risk to those wagers is that Fed chair Jerome Powell and his colleagues signal that investors have gotten ahead of themselves with inflation stubbornly above the central bank’s target and the impact of tariffs still playing out on prices.
That backdrop is amping up scrutiny of Powell’s remarks and officials’ rate projections – the so-called dot plot – to assess whether the Fed plans a more cautious approach on easing policy.
“My gut tells me 25” this week, meaning a quarter-point cut, said Jack McIntyre, a bond portfolio manager at Brandywine Global Investment Management.
“The issue is does the statement see the Fed emphasise labour more than inflation?”
McIntyre, for one, has been buying bonds, and has added 30-year debt on the view that further evidence of a softening job market may lead investors to view the Fed as having waited too long to ease.
Financial markets broadly are leaning toward concerns around the employment picture taking precedence tomorrow, and the Fed conveying a dovish tone.
In bonds, yields on benchmark 10-year Treasuries are around the lowest since April.
Meanwhile, the S&P 500 Index is near a historic high, while the tech-heavy Nasdaq 100 Index just posted its longest streak of gains in more than a year on its way to a fresh record on Friday.
And in currencies, the dollar has struggled to rebound from its biggest first-half loss since 1973, weighed down in part by expectations of deep Fed cuts.
Some equities traders, however, are hedging against a possible jolt of volatility, in part because the anticipated result of a quarter-point cut is already priced in.
Options traders are betting the S&P 500 will swing about 1% in either direction on Wednesday, which would be the gauge’s biggest move in about three weeks.
For Gareth Ryan, managing director at IUR Capital, the degree of easing reflected in the Fed’s dot plot will be crucial. If it confirms another cut by year-end and in the first quarter of 2026, he said he wouldn’t expect a major reaction in equities.
“But if the dot plot is less clear about first-quarter rate cuts, then that opens the door for a bigger market move,” he said.
“With inflation proving stickier but not reaccelerating, labour data softening and consumer spending stable, traders are increasingly weighing the odds of a more aggressive Fed easing path and how that supports further gains in Treasuries,” said Michael Ball, Macro Strategist, Markets Live.
JPMorgan Chase & Co’s trading desk has warned of a similar threat for stocks, saying the meeting “could turn into a ‘Sell the News’ event as investors pull back.” – Bloomberg
