Is a Fed Interest Rate Cut Coming Soon?

Year-to-date, the Federal Reserve has maintained interest rates at current levels, despite political pressure to lower them. Is a rate cut coming soon? To answer that, markets and investors look to the labor market and inflation trends, which directly impact monetary policy and the likelihood of a Fed interest rate cut.  

Data shows that the labor market is gradually slowing down, as characterized by a “slow to hire, slow to fire” environment. “Slowdown” carries negative connotations, but when it comes to interest rates, a slowdown supports a cut.  

Interest rate cuts encourage economic growth, so in periods where economic growth is low or declining and the labor market is soft (meaning unemployment may be rising and/or employers are not hiring), reducing interest rates can help stimulate the economy with cheaper financing for homes, cars, and business loans.  

July’s underlying consumer price inflation (CPI) accelerated but stayed in line with forecasts, while producer price inflation (PPI) rose sharply and unexpectedly — raising concerns that higher tariff-induced import costs may pass to consumers or pressure future corporate earnings. 

Consumer inflation expectations (gauged by asking consumers if they expect inflation to rise over different periods of time) tell another intriguing story. Expectations spiked preceding and following the reciprocal tariff announcements earlier this year. However, they have since eased as uncertainty about tariff policy wanes. Consumer inflation expectations play a critical role in determining whether the Fed meets its inflation mandate, as the Federal Reserve needs consumers to believe it can hit its inflation targets.  

Overall, while a softer labor market supports the case for rate cuts, inflation surprises complicate the outlook because of the Fed’s dual goals of price stability and full employment. 

Even still, markets currently anticipate a 25-basis-point cut by September and 50 basis points of total cuts by the end of the year.

The Federal Reserve’s policy directly shapes the cost of borrowing, the value of assets, and economic growth. Specifically, interest rates impact returns on savings and bank deposits and affect the borrowing costs for mortgages, credit cards, and cars.  

For investors, lower interest rates are generally supportive of stock valuations, and falling yields are positive for bond prices (because of the inverse relationship between yields and bond prices).  

Regardless of expectations for a Fed interest rate cut, with equity markets hovering near all-time highs, this is a critical moment for investors to rely on disciplined portfolio management rooted in fundamentals, diversification, and risk management.  

For Credent clients, this means staying focused on appropriate asset allocation as determined by your Credent team and financial plan. Our investment management experts consider and incorporate rate cut expectations into their portfolio allocations to keep clients well-positioned in the markets.  

Have a question about the market, economy, or how to respond to Fed interest rate cuts? Ask a Wealth Advisor using the form below.