Rate Cut 2025

Fri. Aug. 22, 2025 – POWELL PIVOTS TO RATE CUTS

Fed Chairman Jay Powell opened the door to cutting rates in September. Powell was more dovish this morning, making it explicit that he does not want the labor market to weaken. Powell also adopted the view that tariffs could raise prices, yet that is likely to be short-lived and slow growth (i.e., Waller). Still, Powell did not fully pound the table on rate cuts largely because he sees the inflationary effects from circulating tariffs and urged caution. The odds of a Fed rate cut jumped from 60 to nearly 100 percent with stocks recovering half of their losses from this week.

Looking at sectors daily returns, what went up the most are cyclical stocks, not defensives nemefitting from lower rates. This is a Summer market.

update August 26th – The fed-funds futures market (see chart above) was pricing in one and a third of cuts of a one-quarter percentage point each by year end, but After a dovish Jackson hole, nearly 2 rate cuts are priced, and 5.5 for the end of 2026, or -133 bps. We are updating our Inflation (now rate cuts denominated) fractal to study the impact of the (1) jackson Hole on stocks/ sectors. Here is a basket of stocks specifically benifitting from a coming rate cut on the right hand chart. Crossing that fracal with our best quantitative grades and in a regime like Summer with the EPS grade, the first ten names could be considered in our quantamental longs if we can buy them at the right price, like Eaton (ETN US), or FCX. META, AVGO, JPM, COF are already part of our US quantamental longs.

The Fed’s latest Summary of Economic Projections made the growing cracks even clearer. While the median forecast still shows two rate cuts this year, policymakers are split. Seven of the 12 voting members on the Federal Open Market Committee see no rate cuts at all. A handful want to move faster. And two of the loudest voices pushing for action, Vice Chair for Supervision Michelle Bowman and Gov. Christopher Waller, are Trump appointees. Waller’s name is being floated as a potential replacement for Powell when his term ends next spring.

Macro Analysis

Markets are now heavily pricing in an interest rate cut at the September 16-17 FOMC meeting, as indicated by the Fed Funds Futures chart above. This sentiment is amplified by the ongoing “Trump-Cook saga,” which challenges the independence of the Federal Reserve and the American system of checks and balances.

The currently anticipated cut could be classified as unexpected. This is because, at the last meeting, Chairman Powell’s tone was more hawkish than anticipated, possibly as a way to stand firm against pressure from President Trump and assert the Fed’s independence.

The recent dovish tone from the Jackson Hole symposium was quite unexpected by the market, a shift confirmed by the bond market’s reaction. A key idea in monetary policy is distinguishing between the immediate interest rate target and the future path of policy. Currently, there is uncertainty surrounding both. If President Trump were to set the target, he might call for 300 basis points in cuts, which is an unrealistic scenario.

The 10-Year US Treasury Yield (USGG10YR) has fallen from 4.33% to 4.25% as shown in the graph above. A falling yield indicates that the bond’s price is rising, suggesting increased demand. This speach also push the front end of the curve lower more quicly that the 10 year. This movement has led to a steepening of the yield curve, which could result in a contraction at the front end and an increase at the long end—a potentially dangerous path for compagny depending on the high end of the curve with high finance linked to 0 yeards or more.

Ultimately, a weaker dollar combined with falling long-term interest rates points to a dovish surprise from the U.S. Federal Reserve. This suggests the Fed’s recent communications have been interpreted as less aggressive on inflation than investors had previously anticipated. This new perceived “path” for future policy makes holding short-term bonds less attractive, and the long end more attractive as investors seek to lock in a higher yield.

It is worth highlighting the recent surge in gold prices from $3,325 to $3,375. It raises the question of whether certain equity segments, particularly mining companies, could benefit from this development, even if only indirectly. At the same time, the simultaneous appreciation of both equities and a traditional safe-haven asset such as gold suggests a potential market distortion, unless the answer is a weaker dollar.

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