Markets are pricing in three rate cuts by year-end. Why the Fed might agree.

The Federal Reserve is set to implement a 25-basis-point rate cut at its upcoming meeting, with markets pricing in three cuts by year-end, driven by a significant deceleration in the U.S. economy. This pivot reflects a deteriorating labor market, evidenced by job creation slowing to 30,000 per month, and broader growth concerns, despite tariff-induced goods inflation being viewed as temporary. Consequently, the article advises a defensive portfolio stance, favoring government bonds over equities, while noting a potential short-term rebound for the U.S. dollar as the cut is largely priced in.

Analysis

The Federal Reserve is poised for a significant policy pivot, with a 25-basis-point interest rate cut at the upcoming September meeting viewed as a near-certainty. This shift is a direct response to a rapid deceleration in the U.S. economy, evidenced by job creation slowing from 230,000 per month at the start of 2025 to just 30,000 by August, and unemployment ticking up to 4.3%, a level above what the Fed considers normal. While consumer prices have reaccelerated, this is attributed efeitos to a one-off shock from tariffs on goods, as services inflation remains subdued, leading the Fed to prioritize downside growth risks over a remote threat of a 2022-style inflation flare-up. The market has already priced in three rate cuts by year-end, and the Fed is unlikely to contradict this expectation in its updated 'dot plot' projections, as doing so would risk tightening financial conditions amidst a slowdown. The central bank's focus has clearly flipped from inflation containment to preserving the expansion, marking a major policy change driven by a deteriorating labor market and persistent trade-related uncertainty.

Key Decisions for Investors

• Adopt a modestly defensive portfolio stance by overweighting government bonds, which stand to benefit from Fed easing and weakening growth, while underweighting equities面临 earnings headwinds from the deteriorating labor market.
• Investors should monitor employment data closely, as a clear stabilization in the labor market is the key signal to reconsider the defensive positioning and increase risk exposure.
• Be cautious with short U.S. dollar positions, as the well-telegraphed rate cut is largely priced in, creating a potential for a 'buy the rumor, sell the fact' rebound in the dollar, particularly against the euro (FXE), post-announcement.