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.
While Kelly agrees with the market’s pricing of Fed easing, he sees little evidence in the Fed’s own forecasts for growth and inflation to justify the decision. In their updated quarterly projections, also to be released Wednesday, officials are likely to only downgrade growth and the labor market slightly while their inflation forecast will remain over the central bank’s 2% target into 2027, he said.
“By the fourth quarter of this year, inflation could be 1.2 percentage points above the Fed’s target and rising, while unemployment would be just 0.3 percentage points above their target and stable,” Kelly wrote. “If this is the outlook, why should the Fed cut at all?”
Trump has pressured Fed Chairman Jerome Powell for months into cutting rates this year. On Sunday, he told reporters he expects a “big cut” this week.
Trump-appointed Fed governors Christopher Waller and Michelle Bowman dissented when their colleagues voted to leave rates unchanged in July. Waller, who is one of the president’s top contenders in the race to succeed Powell, has downplayed worries over tariff-induced inflation, while emphasizing growing labor-market concerns.
“If FOMC members could truly ignore pressure from both the administration and their colleagues, there would likely be multiple dissents on both sides of this decision.” said Kelly.
Written by: Liz Capo McCormick — With assistance from Jess Menton @Bloomberg
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