Last week, the expectation from the US Fed was that the FOMC would cut the interest rate twice in 2025. But recent developments may have altered this outlook rapidly. Higher-than-expected inflation could make the US Fed keep rates unchanged in October.
Rate Cut Expectations
US stock market investors are scrambling for answers on whether Fed chief Powell will continue with the rate cut campaign in October and then in December. The economy’s strength, despite tariff pressures, may lessen the need for the Fed to cut rates. September 2025 CPI data are scheduled to be released on October 15.
Federal Reserve Bank of Kansas City President Jeff Schmid signaled the US central bank may not need to lower interest rates again soon, citing the need to keep bringing down inflation, reports Bloomberg.
There are a lot many data points between now and the next FOMC meeting on October 28-29. Therefore, taking a call on which way the rates will move could be too early.
An unexpectedly high inflation report could prompt Fed officials to maintain elevated key fed funds rates to combat inflation above their 2% target. In the weeks ahead, the ADP jobs report, job openings figures and non-farm payroll data, including the unemployment rate number, will play a key role in shaping the expectations of rate cuts ahead in 2025.
In a recent speech, Fed Chair Jerome Powell stated that the central bank has started cutting interest rates, but could change its strategy if inflation gets worse.
Why are U.S. Stocks Falling
On Thursday, the Dow fell 0.38%, while the S&P 500 and Nasdaq both fell 0.5%, marking the third consecutive loss for all three indexes.
On Friday, US stock futures were little unchanged as investors awaited the latest PCE price index, the Federal Reserve’s favored inflation gauge, for further clarity on the interest rate outlook.
The reason behind the September rate cut was the visible weakness in the labour market. So, even though the inflation remained a worry, Powell and team resorted to a rate cut on September 17 to balance out the risks.
Two key sets of economic data released on September 25 paint a somewhat upbeat picture of the economy.
Weekly jobless claims decreased to 218K, indicating a robust labor market, while second-quarter GDP growth was significantly revised up to an annualized 3.8%, driven by strong consumer spending and business investment.
Does this indicate that the economy is shrinking? No. So, equities fell as stronger-than-expected US data lowered expectations for further Fed rate reduction. The 10-year Treasury yield rose to a three-week high above 4.15%, putting additional pressure on markets.