Key takeaways
- The Federal Reserve (Fed) cut interest rates by 25 basis points (bp) at its recent September meeting, as broadly expected.
- Looking ahead, J.P. Morgan Global Research sees two more cuts taking place in 2025, followed by one in 2026.
- An extended Fed cutting cycle could have varying implications for markets, depending on the recessionary backdrop and the cumulative amount of easing.
In line with market expectations, the Fed cut interest rates by 25 basis points (bp) at its recent September meeting, bringing the funds rate to 4.0–4.25%. This was the first rate cut in nine months, and came on the back of a softer-than-expected August jobs report.
Are further rate cuts on the horizon, and what’s the impact on economic and market performance?
“We think a major shift in labor market momentum would be needed to prevent another cut in October.”
Michael Feroli
Chief U.S. economist, J.P. Morgan
Will the Fed continue cutting rates in 2025?
Fed chair Jerome Powell characterized the September move as a “risk management cut” to forestall the prospect of further labor market slowing, casting doubt on whether it marks the start of an extended easing cycle. However, J.P. Morgan Global Research expects two more cuts in 2025, and one in 2026.
“The divergence between the more dovish FOMC dots [which charts short-term interest rate projections from the Fed’s top policymakers] and the more hawkish growth and inflation profiles suggests the recent policy action should be seen as an insurance cut, rather than a substantive shift in the Fed’s reaction function. That said, we think a major shift in labor market momentum would be needed to prevent another cut in October, and there will only be one more employment report between now and then,” said Michael Feroli, chief U.S. economist at J.P. Morgan. “However, if labor market risks don’t materialize in the fourth quarter — particularly in the form of a higher unemployment rate — then the Committee might pause after the October or December meetings.”
During his press conference, Powell noted that the economy is in a “curious kind of balance,” with unexpectedly sharp declines in both labor demand and labor supply. Yet, he also acknowledged that the economy is still in decent shape overall. “The fact that the median unemployment forecast for 2025 was unchanged from June may suggest the Committee is hesitant to read too much into recent job slowing, although the broad support for the rate cut certainly reflects a concern that downside risks to the labor market have become a reality,” Feroli added.
What could a Fed cutting cycle mean for markets?
According to J.P. Morgan Global Research’s analysis of historical data, returns across asset classes will largely depend on the recessionary backdrop and the cumulative amount of easing. Two main scenarios could play out:
Recessionary easing
In a recessionary environment, U.S. Treasuries and gold could outperform risky assets. “Not only does gold act as a natural hedge in a risk-off scenario, but it also benefits from the lower opportunity cost of holding the non-yielding asset as interest rates decrease,” said Fabio Bassi, head of Cross-Asset Strategy at J.P. Morgan. “In contrast, riskier asset classes such as U.S. high-yield corporate bonds and the S&P 500 typically experience mainly negative returns during such periods.”
Non-recessionary easing
In non-recessionary easing cycles, risk-on positive performance is usually evident, with the S&P 500 and U.S. high-yield leading returns. “Gold could continue to provide diversification and see positive returns, but less so than in a recessionary environment,” Bassi said.
Historically, in mid-cycle, non-recessionary easing scenarios — where policy rates were taken from restrictive to less-restrictive levels — gold and the S&P 500 led the largest average returns, followed by Treasuries and U.S. high-yield.
In late-cycle, non-recessionary easing scenarios — where further rate cuts were made after a long pause, following an extended period of below-neutral policy rates to stimulate the economy — most asset classes delivered positive returns, led by gold and U.S. high-yield, while lower interest rates resulted in negative returns in the U.S. Dollar Index.
“Looking ahead, the insurance rate cut and our baseline call for no recession lead us to anticipate a typical mid-cycle, non-recessionary easing scenario,” Bassi said.
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