Fed to Debate Pace of Cuts Amid Board Upheaval, Pressure

Yelena Shulyatyeva, senior US economist at The Conference Board, previews this week's Fed meeting and how she predicts inflation rates will play out in the upcoming months.

President Donald Trump predicted a “big cut” from the Federal Reserve this week ahead of a pivotal meeting at which the central bank’s governors are expected to ease policy for the first time in nine months.

“I think you have a big cut,” Trump told reporters on Sunday on his way back to Washington. “It’s perfect for cutting.”

The Fed is widely expected to cut interest rates on Sept. 17 as it grapples with a slowing labor market, stubborn inflation and an unprecedented push by Trump for lower borrowing costs. The median estimate from a Bloomberg survey of economists is for a 25 basis-point reduction.

Trump has been putting pressure for months on Fed Chair Jerome Powell to cut rates and repeatedly encouraged him to resign.

Recent weak economic reports are raising concerns that the labor market may slide into a deeper slowdown, threatening consumer spending and growth. At the same time, inflation remains above the Fed’s 2% goal and could rise further if tariffs push up costs, leaving some officials cautious about acting too quickly.

The Federal Reserve’s widely expected interest rate cut this week will increase risks for stocks, bonds and the dollar if it’s perceived to be driven by political pressure and doesn’t align with the central bank’s forecasts for the economy, according to David Kelly, chief global strategist at JPMorgan Asset Management.

Wall Street bond and stock investors, who have been cheering over the Fed’s expected resumption of interest rate cuts after a nine month pause, should instead take a cautious stance and look to diversify after the recent rally, Kelly wrote in a note Monday.

Ten-year US Treasury yields have tumbled back to near 4%, after approaching 5% in late May, as signs of a faltering US labor market solidified expectations for a quarter-point rate cut this month, followed by a series of reductions well into next year. Meanwhile a $14 trillion rally in US shares has taken key stock market indexes to record highs this month.

“To the extent that the Fed’s decision this week is seen as a capitulation to political pressure, a new layer of risk is being added to U.S. financial markets and the dollar,” Kelly said.

He said that “markets are frothy” and easing now is more likely to weaken demand than increase it and “ultimately be negative for stocks, bonds and the dollar.”

Since markets bounced after an initial selloff over President Donald Trump’s April 2 announcement of widespread tariffs, investors have been sitting on lucrative gains on portfolios that allocate investments to both stocks and bonds. So-called 60/40 investment strategies have reaped returns of about 20%, according to a Bloomberg index.

US Treasuries have gained 5.6% this year through Friday, according to a Bloomberg index. Meanwhile, the Bloomberg Dollar Index has stabilized since early July, when it touched its lowest since 2022.

Kelly isn’t alone in predicting that the record-setting stock rally could come to a halt once the Fed resumes cutting rates. Strategists from Morgan Stanley, JPMorgan Chase & Co. and Oppenheimer Asset Management also warned that a more cautious tone may replace the bullish mood as investors focus instead on a potential economic slowdown.

--------

Watch Bloomberg Radio LIVE on YouTube

Weekdays 7am-6pm ET

Follow us on X

Subscribe to our Podcasts:

Bloomberg Daybreak

Bloomberg Surveillance

Bloomberg Intelligence

Balance of Power

Bloomberg Businessweek

Listen on Apple CarPlay and Android Auto with the Bloomberg Business app:

Apple CarPlay

Android Auto

Visit our YouTube channels:

Bloomberg Podcasts

Bloomberg Television

Bloomberg Originals