September 17, 2025

(THE PATH AFTER RATE CUTS MAY NOT RESEMBLE A WALK IN THE PARK)

September 17, 2025

Hello everyone

In August, following the US Fed’s forward guidance at Jackson Hole, we realized that a shift was evident. Rather than fighting inflation, a focus on supporting employment through monetary easing was on the Fed’s radar.

Markets are now pricing in a 25bps cut this week. The US bond market appears to be in quiet agreement, with falling yields, suggesting inflation is not a concern amid looser policy.

Unlike Q3 2024 – when the Fed began easing but bond markets pushed back with higher yields – this time, the bond market seems aligned. That suggests the US may now be entering a genuine rate-cutting cycle.

So, it would seem that all is well.

Not quite.

The context behind rate cuts is critical. Historically, easing into a backdrop of low inflation and robust employment supports strong market performance. But cutting rates into economic weakness tends to spark an initial rally – often lasting through the first few cuts – before markets top out and begin a multi-month decline. This is typically the result of central banks acting too late. The downturn usually continues until the so-called terminal rate cut – when policy support, including quantitative easing, can return in full force and lay the groundwork for the next upward cycle.

Let’s go back to the Global Financial Crisis. Rate cuts began in July 2007, but equity markets topped just a few months later in October, followed by a prolonged correction throughout the easing cycle.

So, while the S&P500 continues its 18-year parabolic ascent, the Fed looks set to begin a true easing cycle and let markets approach their own 18.6-year cyclical peak – this is not the time for complacency.

It’s very clear the Fed is focused on reviving employment, and this points to a weakening labour market. This supports the “cutting into weakness” narrative. Given that markets have historically endured 1-3 rate cuts before topping out, and with the S&P already heading towards euphoric territory, Q4 could prove to be just that – euphoric – before the real test begins.