Are Stock Markets Forgetting Why They Want Fed Rate Cuts?
Are Stock Markets Forgetting Why They Want Fed Rate Cuts?
By:Ilya Spivak
Markets are cheering as Fed rate cut bets solidify, but have they forgotten why they want support?
- S&P 500 hits a record as markets bet the Fed will surely cut rates next month
- Incoming GDP data looks set to show the world’s top economies are slowing
- How long can stocks resist a reckoning with why they’re pining for stimulus?
Stock markets cheered as Federal Reserve interest rate cut expectations continued to solidify. Benchmark Fed Funds futures now price in a 100% probability of a cut in September. A standard 25-basis-point (bps) reduction is favored, with a likelihood of 93.7%. A slight 6.3% chance of a 50bps down step has now emerged as well.
The longer term view has turned more dovish too. The markets have now discounted 125bps in rate cuts from now through the end of 2026, with 58bps on the menu for this year and 68bps for the next one. For 2025, that is the most forceful stimulus projection in six weeks. For next year, it is a far cry from the 25bps projected by Fed officials.
Growth in the world’s top economies is slowing
The bellwether S&P 500 stock index rose 0.3% to close at a record high. Treasury bond yields fell across maturities. Gold prices edged higher while the US dollar declined against its major counterparts. The euro added 0.27% while the yen rose 0.21%. Bitcoin surged 2.73%, revisiting its all-time high set in July.
Traders’ embrace of stimulus comes ahead of gross domestic product (GDP) data set to show some of the world’s largest economies are slowing. In the UK, output is seen rising just 0.1% in the second quarter, down from 0.7% in the first three months of the year. Updated Eurozone GDP numbers paint a similar picture, down to 0.1% from 0.6% previously.
Japan is expected to deliver a 0.1% rise in GDP, which marks a mild improvement after a flat result in the first quarter. Taken together, this makes the first six months of this year the weakest period for the world’s fifth-largest economy since it suffered through a shallow in the second half of 2023.
Stocks and Fed rate cuts: be careful what you wish for
This makes for a curious disconnect. The markets are clearly elated with the thought that policy support from the US central bank seems ready to arrive at last. However, they seem somewhat strangely cavalier about why they’re pining for it: global economic growth is slowing, and the US may not be strong enough to save it.
Indeed, second-quarter US GDP data showed consumption – the biggest contributor to growth at 68% of total output – made its weakest contribution to overall growth in the first half of 2025 since the COVID-19 recession five years ago. The two top global GDP engines besides the US – the Eurozone and China – have been near standstill since last year.
It is understandable why the markets want Fed rate cuts and cheer their proximity against this backdrop. However, trading from strength to strength in recent months seems to surmise an ideal world where policy affords a perfect backstop against weaker economic activity and earnings growth. A reckoning with reality seems due.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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