US Rate Cuts This Week – What to Expect

Since the US Fed’s forward guidance at Jackson Hole in August signalled a shift from fighting inflation to supporting employment, monetary easing has been on the radar.

Markets are now all but pricing in a 25bps cut this week. The US bond market appears to be in quiet agreement, with falling yields (white) suggesting inflation is not a concern amid looser policy. Lower yields are increasing bond collateral values, while bond volatility (blue) continues to trend down—both strong liquidity signals heading into Q4. Meanwhile, the S&P 500 is charting an almost vertical trajectory, showing a clear parabolic pattern that’s been building since the Global Financial Crisis.

Unlike Q3 2024—when the Fed began easing but bond markets pushed back with higher yields—this time, the bond market seems aligned. That suggests the US may now be entering a genuine rate-cutting cycle.

Clear skies ahead, then? Not necessarily.

The context behind rate cuts is critical. Historically, easing into a backdrop of low inflation and robust employment supports strong market performance. But cutting rates into economic weakness tends to spark an initial rally—often lasting through the first few cuts—before markets top out and begin a multi-month decline. This is typically the result of central banks acting too late. The downturn usually continues until the so-called terminal rate cut—when policy support, including quantitative easing, can return in full force and lay the groundwork for the next upward cycle.

A useful precedent is the Global Financial Crisis: rate cuts began in July 2007, but equity markets topped just a few months later in October, followed by a prolonged correction throughout the easing cycle.

So, while the S&P 500 continues its 18-year parabolic ascent, the Fed looks set to begin a true easing cycle, and land markets approach their own 18.6-year cyclical peak—this is not the time for complacency.

The Fed has made clear its renewed focus on employment, which likely points to a weakening labour market. This supports the "cutting into weakness" narrative. Given that markets have historically endured 1–3 rate cuts before topping out, and with the S&P already in near-euphoric territory, Q4 could prove to be just that—euphoric—before the real test begins.