Here's What History Says Will Happen a Month and Year After the Fed's Rate Cut
News Summary
The odds of the U.S. Federal Reserve announcing a quarter-point rate cut on September 17, 2025, have surged to 94.2% according to CME's FedWatch tool. This potential rate cut comes as the S&P 500, Bitcoin, and gold are at or near all-time highs. The Fed faces a conflict in its dual mandate of price stability and maximum employment, with core inflation above 3.10% and a weakening labor market, evidenced by annual revisions showing a drop of 911,000 jobs. While a rate cut is widely anticipated, experts are divided on its immediate impact. Peter Chung, head of research at Presto Research, suggests that Fed Chair Jerome Powell’s forward guidance will be more critical for short-term market reactions. The long-term outlook for risk-on assets, including Bitcoin, remains bullish, with HashKey Capital forecasting Bitcoin could hit $700,000 by the end of 2035. The Kobeissi Letter highlighted that the S&P 500 index historically ends up higher a year later when the Fed cuts rates within 2% of the index’s all-time highs. Regarding the total number of cuts this year, some analysts expect at least three, while others believe a second 25 basis point cut would require either a material deterioration in labor markets or convincing evidence that inflation is sustainably converging to 2%.
Background
The U.S. Federal Reserve (Fed) operates under a dual mandate of maintaining price stability and achieving maximum employment. Currently, core inflation remains above the Fed's target, while the labor market shows significant signs of weakening, creating a complex dilemma for monetary policy decisions. Following the re-election of President Donald J. Trump in November 2024, his administration's stance on Fed policy, particularly regarding Chairman Jerome Powell, adds a layer of political uncertainty to the monetary policy outlook. High market expectations for rate cuts have already influenced valuations of risk assets, including equities and cryptocurrencies, with assets like Bitcoin being closely tied to macro liquidity and market risk appetite.
In-Depth AI Insights
What are the underlying economic pressures compelling the Fed's action despite persistent inflation, and what does this imply for the "soft landing" narrative? - The reported 911,000 drop in labor market estimates is a significant driver, suggesting a weakening employment picture. This conflicts with the "price stability" mandate, as inflation remains above target. The Fed might be prioritizing employment stability over strict inflation targeting, or it perceives the current inflation as less demand-driven and more supply-side sticky, hence less responsive to higher rates. This complicates the soft-landing narrative, suggesting a potential trade-off where a rate cut might avert a deeper recession but could entrench inflation longer. Investors should consider the possibility that the Fed's actions are a pre-emptive strike against a more severe downturn, rather than a clear signal of inflation being under control. Given President Trump's re-election and his historical critical stance on Jerome Powell, how might political pressure influence the Fed's independence and subsequent market reactions beyond economic fundamentals? - The article explicitly mentions Trump's past consideration of firing Powell. A re-elected Trump administration could exert renewed pressure on the Fed chair, particularly if monetary policy diverges from the administration's growth objectives. This political overhang introduces a non-economic variable into Fed decision-making. Markets might interpret any dovish pivot by the Fed as capitulation to political pressure rather than being purely data-driven, potentially raising concerns about the Fed's long-term independence and leading to unforeseen volatility in capital markets as investors try to price in irrational factors. Furthermore, this uncertainty might cause a "buy the rumor, sell the news" reaction in risk assets in the short term, as any rate cut is seen as a response to political pressure rather than a sign of economic health. With risk-on asset valuations already described as "stretched," what are the nuanced long-term versus short-term implications of a rate cut for different asset classes like cryptocurrencies and equities? - Derek Lim, head of research at crypto market-making and trading firm Caladan, cautioned that markets anticipating a quarter-point rate cut have led to “stretched valuations across multiple asset classes.” In the short term, a hawkish surprise from Powell could complicate the Fed's price stability mandate, leading to immediate volatility. However, historical data suggests the S&P 500 index typically ends up higher a year after the Fed cuts rates near all-time highs, indicating potential benefits for long-term holders. For cryptocurrencies, despite short-term unpredictability, Caladan’s three-month estimates reveal a bullish outcome 62% of the time with an average gain of 16.50% post-cut, with HashKey Capital estimating Bitcoin will hit $700,000 by 2035. This suggests that while markets might see short-term pullbacks due to "sell-the-news" reactions amid stretched valuations, long-term investors may continue to favor risk assets, especially crypto, on the back of sustained liquidity injections and the inflation-hedging narrative.