^{Photo: BBC}

From Friday’s Rally to Monday’s Caution

Markets entered this week with mixed emotions. Friday’s surge of optimism, sparked by Fed Chair Jerome Powell’s remarks at the Jackson Hole symposium, quickly gave way to Monday’s reality check. Powell signaled that economic conditions “may warrant adjusting our policy stance,” a phrase widely interpreted as Fed-speak for rate cuts.

Stocks initially jumped, and Treasury yields fell sharply on the news, reinforcing investor expectations that the Fed will reduce its benchmark rate at its September 17 meeting. But by Monday, caution replaced enthusiasm as Wall Street turned its attention to what happens after September.

September Cut Seen as Near-Certain

The probability of a quarter-point rate cut in September is now around 82%, according to CME Group’s FedWatch tracker of futures prices. That’s a significant jump from just 62% a month ago.

Currently, the Fed’s target range sits near 4.3%. A September move would mark the first cut of 2025, potentially easing pressure on households, businesses, and global markets that remain sensitive to U.S. monetary policy.

Yet beyond September, the outlook gets murkier. Futures markets suggest only a 42% chance of a second cut in October and a stronger — though still uncertain — likelihood of a follow-up in December. As it stands, there’s just a 33% probability of three cuts in total this year.

A Debate Over the Pace of Easing

Market experts remain divided over how aggressive the Fed should be. Jason Granet, CIO at BNY, noted that Powell “moved the door ajar, as opposed to kicked it wide open for September,” signaling caution rather than urgency.

Others point to inflation risks tied to tariffs and an economy that, while showing cracks in the labor market, remains relatively resilient. Morgan Stanley’s Lisa Shalett put it bluntly: “What problem, exactly, does the Fed feel an urgency to solve?” She estimates just a 50% probability for a September cut and warned clients against banking too heavily on rate reductions to fuel stock gains.

Lessons From 2024’s Rate Moves

Memories of last year’s easing cycle continue to shape investor sentiment. In 2024, the Fed slashed rates by a full percentage point, but instead of lowering borrowing costs across the board, Treasury yields and mortgage rates rose. That unintended consequence rattled markets and sparked debate over whether cuts were premature.

Ed Yardeni of Yardeni Research cautions against repeating that mistake, especially as tariff-driven inflation lingers. “The cautious tale is what happened last year when the Fed lowered by 100 basis points and the bond yield went up 100 basis points,” he said.

If a similar scenario unfolds, it could undermine the White House’s push for lower debt financing costs and weigh on the housing market, where buyers are eagerly waiting for mortgage relief.

What It Means for Stocks

Despite the uncertainty, many on Wall Street remain bullish on equities. Yardeni projects the S&P 500 could climb another 2% this year to finish around 6,600, with a further 14% surge in 2026 to roughly 7,500. He believes earnings growth — not just rate cuts — will continue driving the bull market.

If the Fed does move forward on September 17, the rally could gain new momentum, particularly if investors view it as the start of a carefully managed easing cycle rather than a hasty retreat.

The Bottom Line

Investors are nearly unanimous that the Fed will deliver a rate cut in September, but the broader path remains clouded by inflation risks, political pressure, and the lessons of last year’s easing missteps.

For now, markets are balancing optimism with caution. A September cut looks like a done deal — but whether it marks the beginning of a broader cycle or just a modest adjustment is the real question hanging over Wall Street.

‍