From Powell’s dovish speech at Jackson Hole to the sharp slowdown in August payrolls and the softer CPI print, rate-cut expectations have gone from cautious to aggressive. Markets are now almost fully pricing in back-to-back cuts over the next few meetings. This Thursday’s FOMC meeting is the big one — not only will we get the September rate decision, but also the updated dot plot. And history tells us: when everyone is positioned on the same side, even a small surprise can trigger big market swings.
The Data Behind the Cuts: A Warning Sign
Markets are treating a September cut as a near certainty. Fed funds futures put the odds of a 25-bp cut at 96%, basically a done deal. But this round of easing isn’t happening because inflation is already at target — it’s happening because the labor market is breaking down. August nonfarm payrolls added just 22K jobs, way below the 75K consensus and the weakest reading in years. The prior months have also shown a clear downward trend.
Source: CME FedWatch
This puts the Fed in a tough spot. Its dual mandate is to keep inflation under control and maintain full employment. Core inflation is still running at 2.9%, well above the 2% target, but the jobs market is already deteriorating. In other words, the Fed is being forced to cut rates defensively to protect jobs, not because the economy is healthy enough for a normal policy pivot. That should tell us something: the underlying economic stress is probably much worse than the market narrative suggests.
Yes, retail sales still look resilient — September grew 0.6% MoM, triple expectations — but this might just be a lag effect from past wage gains and existing job levels, not a sustainable trend. If hiring freezes continue and wage growth slows, consumer spending could roll over next quarter. Right now, the gap between “weak jobs” and “strong consumption” feels more like a temporary mismatch than a real improvement, and markets may be underestimating the risk of a delayed consumption slowdown.
The Double-Edged Sword of Rate Cuts
On the surface, rate cuts are bullish — cheaper money, easier credit, liquidity support — good news for growth stocks and high-multiple assets. But this isn’t a “victory lap” cut; it’s a defensive move with recession undertones. The Fed is cutting not because the economy is strong, but because it’s trying to cushion a downturn.
If markets focus only on the short-term liquidity boost and ignore the fact that the Fed is worried about a slowdown, they risk mispricing the cycle. As more data confirm slowing business investment, persistent job losses, and eventually weaker consumption, investors could flip from “yay, rate cuts!” to “uh-oh, recession ahead.” That’s when sentiment can turn hard and fast.
New Highs, But Rising Risk
U.S. equities $S&P 500(.SPX)$ $NASDAQ(.IXIC)$ $Dow Jones(.DJI)$ have rallied to all-time highs on the back of aggressive rate-cut bets. But with so much good news already priced in, the upside from here looks limited. Valuations are stretched, and markets are becoming more sensitive to negative surprises than to positive ones.
Source: TradingView
At these levels, any data miss or sign of fundamental deterioration could spark a pullback. If investors start to realize that rate cuts won’t magically fix a weakening labor market and slowing economy, we could see fast profit-taking and portfolio de-risking. In short, this is no longer a straightforward “buy everything” market — it’s a market at a tipping point.
Invesight Viewpoint
In this environment, blindly chasing liquidity-driven rallies is risky. A smarter approach is to focus on risk management:
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Add some defensive exposure (e.g. quality, low-volatility assets).
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Use hedging tools like options to protect against tail risk.
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Keep portfolios flexible so you can adjust quickly if sentiment flips.
Volatility is likely to stay elevated. Staying proactive — not reactive — is key to navigating what comes next.
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