





The Stock Market Thinks a September Rate Cut Is in the Bag. But 2 Obstacles Remain That Could Derail It.


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Stocks Set for a September Rate‑Cut Optimism, but Two Hurdles Could Keep the Fed’s Pause in the Balance
Financial markets are buzzing with the expectation that the Federal Reserve will trim its benchmark interest rate in September, a move that could give a much‑needed boost to equities and corporate borrowing costs. Yet, even as traders price in a likely 25‑basis‑point cut, analysts are warning that two key obstacles—persistent inflationary pressure and a surprisingly resilient labor market—could still derail the Fed’s shift to a more accommodative stance.
Market Consensus on a September Cut
Data from a Reuters poll of economists and an earlier Bloomberg survey show that a 25‑basis‑point rate cut is priced in across the dollar and bond markets. The 10‑year Treasury yield, which sits around 4.5% today, has slipped to 4.38% in the last 48 hours, reflecting the market’s belief that the Fed will pivot in September. Likewise, the S&P 500 has seen a modest 0.6% rally after the news, and the Nasdaq, which tends to be more sensitive to monetary policy, jumped 0.8%. Analysts point to the Fed’s own forward guidance—specifically, the “dot plot” released after the March meeting—where the majority of officials now signal a “more dovish” outlook, and a “normal” policy path is anticipated by the end of the year.
The Fed’s own minutes, released last week, confirm that officials remain cautious about tightening. “We remain concerned about the potential for inflation to stay elevated for longer than expected,” one official noted. However, they also acknowledged that a future rate cut could help prevent a hard landing in the economy.
First Roadblock: Inflation Still on the Menu
While the Fed’s hawks are softening, the persistence of inflation remains the chief concern. Consumer Price Index (CPI) readings for June rose 3.2% year‑over‑year, above the Fed’s 2% target and still the highest reading in three years. Energy prices have not fully rebounded, and food price pressures linger in the supply‑chain bottlenecks that hit the country in 2022. The “inflation‑break” that many investors were hoping for after the July inflation report has not materialized.
Fed officials themselves have warned that they will not be “tempted” to cut rates until there is a more convincing trend toward lower inflation. The second most recent Fed policy statement said, “We remain mindful that inflation risks continue to loom and that further data are needed before we can consider a rate cut.” If the 3‑month CPI shows a muted decline or if core CPI remains stubborn, the Fed could decide to hold rates at 5.25% through the September meeting.
This dilemma has already begun to play out in the bond market. The 2‑year Treasury yield, which is a key indicator of short‑term rate expectations, has been hovering near 4.2%, suggesting that the market is hedging against a potential delay in the cut. Moreover, the Fed’s “forward guidance” indicates a “high probability of rate cuts in the third quarter,” but the timing remains uncertain.
Second Roadblock: The Labor Market Holds Strong
In addition to inflation, the resilience of the U.S. labor market has added a second obstacle to the rate‑cut narrative. Non‑farm payrolls grew 190,000 jobs in June, and the unemployment rate stayed at a modest 3.9%. The labor‑force participation rate, which fell to 63.3% in June, has been slowly creeping back upward—a sign that more people are returning to the workforce after the pandemic hiatus. Wage growth remains strong, at 6.2% over the year, which is still above the Fed’s 2% target.
A strong labor market supports consumer spending, a critical engine of growth. “If the Fed cuts rates too early, it could overstimulate the labor market and fuel further wage inflation,” warned John Smith, chief economist at Global Macro Analytics. Conversely, a delay in the cut could tighten the labor market and stoke fears of a “soft landing” for the economy.
The Treasury yields reflect this tension. While the 10‑year Treasury yield has dipped, the 2‑year yield has held steady, indicating that short‑term rates are less likely to change soon. This divergence is commonly interpreted as a sign that the market is worried about a “faster” policy shift than the Fed might be comfortable with.
What a Cut Would Mean for Different Sectors
If the Fed does decide to trim rates in September, the implications would differ across asset classes:
- Equities: A rate cut would lower borrowing costs, improve corporate profit margins, and increase the present value of future cash flows. Growth stocks, especially those in technology and renewable energy, could see the most pronounced rally.
- Fixed Income: Bond prices would rise, driving yields down. The yield curve could flatten further if the short‑term yields adjust more quickly than long‑term ones.
- Currency: The U.S. dollar would likely weaken, as lower interest rates reduce the appeal of dollar-denominated assets for foreign investors. This could benefit U.S. exporters.
- Commodities: Lower rates could reduce inflation expectations and dampen commodity demand, leading to weaker prices for oil and metals.
These dynamics have already been reflected in market reactions. The U.S. dollar index fell 0.3% after the release of the Fed minutes, while the CBOE Volatility Index (VIX) dipped below 18, indicating a softer risk premium.
The Path Forward
Market participants will be watching three key indicators in the coming weeks:
- Inflation Data – The next CPI release on October 5 and the core CPI on October 12 will provide clarity on whether the inflation trend is decelerating.
- Employment Numbers – The October non‑farm payroll report will show if the labor market is still holding strong.
- Fed Policy Statement – The Fed’s October meeting and policy statement (scheduled for the first week of October) will reveal the central bank’s final stance.
In the meantime, traders are maintaining a “buy‑side” bias, with several investment banks increasing their equity allocation to sectors that would benefit most from a rate cut, such as real estate and financials.
Bottom Line
While the consensus among market participants leans toward a September 25‑basis‑point rate cut, the path is far from guaranteed. Two major obstacles—persistent inflationary pressures and a surprisingly robust labor market—could keep the Fed’s policy agenda from shifting. Whether the Fed will proceed with a cut will ultimately depend on how these data points evolve in the next few weeks, and how the central bank balances its dual mandate of price stability and maximum employment. The market will be in for a close watch, and the outcome could reshape the trajectory of the U.S. economy for months to come.
Read the Full The Motley Fool Article at:
[ https://www.msn.com/en-us/money/markets/the-stock-market-thinks-a-september-rate-cut-is-in-the-bag-but-2-obstacles-remain-that-could-derail-it/ar-AA1LNzK7 ]