Are Stocks in Trouble if the Fed Talks Down Rate Cut Speculation?
Are Stocks in Trouble if the Fed Talks Down Rate Cut Speculation?
By:Ilya Spivak
Will the stock market lose steam if the Fed resists deep interest rate cuts?
- Stocks found a way to cheer the US government shutdown amid Fed rate cut hopes
- September FOMC meeting minutes are in focus as most official data remains paused
- Inflation expectations are likely to take top billing in US consumer confidence report
Last week, financial markets found a way to embrace a partial shutdown of the US government amid a budget impasse between Democrats in Congress, their Republican rivals, and the Trump administration. Vital services will continue, but hundreds of thousands of federal workers have been furloughed or are working without pay.
All the same, Wall Street managed to get back on offense, with the bellwether S&P 500 adding 1% while the tech-tilted Nasdaq 100 rose 1.1%. Traders seem to conclude that a fiscal headwind for the economy amounted to a good thing for risk appetite in that it might encourage the Federal Reserve to be generous with interest rate cuts.
Stock markets see Fed rate cuts as the US government shuts down
Tellingly, Treasury bond yields declined across maturities, the US dollar weakened against its major counterparts, and gold prices continued to press higher. The outlook for 2026 seems to be in focus after traders and central bank officials appeared to settle on rate cuts at the two remaining policy meetings of this year, in October and December.
For next year, benchmark Fed Funds futures are pointing to 61 basis points (bps) in further easing. That amounts to at least two standard-sized 25bps cuts and a 44% probability of a third one. By contrast, the median forecast from the policy-steering Federal Open Market Committee (FOMC) is for a single 25bps cut.
The government shutdown robbed traders of September’s official US labor market data, which was lining up as a key input into resolving this disparity. The data that did appear turned out to be supportive of the dovish narrative. The Institute for Supply Management (ISM) showed that US service-sector growth unexpectedly stalled last month.
FOMC meeting minutes, US consumer confidence data in focus
This week, minutes from last month’s FOMC meeting will take center stage. The conclave brought a widely anticipated rate cut but coupled it with forecast updates that seemed to point away from expansive stimulus. Projections for growth and inflation were revised higher alongside a reduction in the expected unemployment rate.
Traders will be keen to gauge how much official resistance to the markets’ more dovish perspective is implied in such signaling. Stock markets may wobble while the US dollar strengthens if they come away with the sense that policymakers are reluctant to be pushed toward greater easing.
US consumer confidence data from the University of Michigan (UofM) will add further context. It is expected to show that sentiment weakened for a third consecutive month. If that comes alongside rising inflation expectations – a well-worn pattern in the past four years – signs of another roadblock to Fed rate cuts might sour risk appetite further.
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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