Will the Fed Keep Cutting Rates? What New Economic Data Means for Traders

The Federal Reserve appears on track for another quarter-point rate cut at its October meeting, with markets largely pricing in a second move by December. Fresh economic data—particularly concerning labor market softness and sticky inflation—continues to push the Fed toward a cautious easing path. But with internal disagreements growing and inflation still above target, traders should prepare for a measured and data-dependent cutting cycle, not a rapid pivot.

Richmond Lee, CFA and Senior Market Analyst at PU Prime commented:

The U.S. dollar has extended its decline, pressured by political uncertainty and growing doubts over the Federal Reserve’s independence. While Q2 GDP was revised higher to 3.8% and consumer spending showed resilience, these positives have been overshadowed by concerns out of Washington. President Trump’s public clashes with Fed Chair Powell and legal challenges involving Governor Lisa Cook have fueled fears of political interference in monetary policy, eroding market confidence.

Labor-market concerns are reinforcing this narrative, with some Fed officials suggesting pre-emptive rate cuts even as PCE inflation remains elevated at 2.9%. Treasury yields have eased in response, reducing the dollar’s yield advantage and amplifying downside risks.

Adding to fragility is the looming prospect of a government shutdown. The potential delay of critical economic releases, including nonfarm payrolls, risks depriving markets of timely policy signals at a moment when clarity is most needed.

Here’s a breakdown of the most critical developments and how they affect trading strategies across equities, bonds, and currencies.

Job Market Weakness Raises Cut Expectations

Despite a relatively low unemployment rate of 4.3%, labor market data has weakened substantially under the surface. The most striking development was the Bureau of Labor Statistics revising down job growth by 911,000 over the past 12 months—the largest downward correction since 2002. That’s nearly equivalent to erasing the entire workforce of a major U.S. city.

Recent monthly reports confirm the slowdown. August added just 22,000 jobs, well below the consensus forecast of 75,000. More importantly, the summer average for job creation came in at just 29,000 per month—a rate historically consistent with pre-recessionary slowdowns.

Implication for traders: Weak labor trends increase the probability of further easing. Rate cuts often support equities, particularly rate-sensitive sectors like small caps and tech. However, sluggish job growth is also a warning signal for corporate earnings and broader economic momentum. Traders should balance upside from rate cuts against downside risk from deteriorating fundamentals.

Inflation Still Running Too Hot for Comfort

The Fed’s preferred inflation gauge—the core PCE index—came in at 2.9%, still well above the central bank’s 2% target. Key contributors to persistent inflation include services (especially healthcare and travel) and housing costs, which remain sticky despite cooling in other areas.

This puts the Fed in a difficult position: while employment data justifies easier policy, inflation limits how far they can go without losing credibility. Cutting too aggressively risks re-igniting price pressures.

Implication for traders: The inflation overhang will likely cap the pace and magnitude of rate cuts. Expect small, measured moves—quarter-point adjustments rather than rapid easing. This makes high-duration assets like long-term bonds vulnerable, while short-duration plays may outperform. Equities may rally on cuts, but upside could be tempered if inflation expectations remain elevated.

Policy Divide Inside the Fed Could Delay Bold Action

Public disagreements among Fed officials are becoming more pronounced. Several policymakers are signaling different paths for monetary policy:

• Dovish camp: Led by Vice Chair Michelle Bowman, this group argues the Fed is behind the curve and must move more decisively to support labor markets.
• Cautious camp: St. Louis Fed President Alberto Musalem emphasized that there’s “limited room for easing” given inflation’s persistence.
• Aggressive doves: Fed Governor Stephen Miran (a Trump appointee) has publicly suggested rates should be as low as 2%, implying nearly 200bps of additional cuts.

Fed Chair Jerome Powell has remained non-committal, maintaining that future decisions will be made “meeting by meeting” and guided by data.

Implication for traders: Disagreement within the FOMC usually translates to cautious policymaking. The Fed is likely to move gradually and avoid surprising markets. This favors steady, predictable rate moves, supporting a carry trade environment in FX and a modest risk-on tilt in equities.

What Markets Are Pricing In Now

Fed funds futures currently assign an 87.7% probability to a 0.25% rate cut at the October meeting. Another cut in December is also largely priced in, with most traders anticipating a year-end target range of 3.50%–3.75%.

Large institutions broadly align with this view. Goldman Sachs expects three cuts total in 2025, while Morgan Stanley is more cautious, questioning whether the current economic backdrop—especially with solid Q2 GDP growth of 2.1%—justifies more stimulus.

Evolution of October FOMC meeting forecasts. Source: FedWatch

Implication for traders: Market expectations are already aligned with a soft-landing scenario. Upside surprises to inflation or downside shocks to labor data could upset this balance quickly. Traders should monitor incoming macro data closely, particularly the next nonfarm payrolls and CPI releases, as catalysts for repricing.

Historical Patterns Signal Risks Ahead

History offers important context: since 1965, 8 out of 10 Fed cutting cycles have ended in recession. Only twice—in 1995 and 1998—did so-called “insurance cuts” successfully prevent a downturn. Those cycles involved modest rate reductions to preempt weakness, rather than respond to ongoing deterioration.

So far, the Fed has trimmed rates by 75bps from their peak. If two more 25bps cuts occur by December, the total easing would reach 125bps—well short of the ~200bps historically associated with preventing recession.

Implication for traders: While markets are trading on hopes of a soft landing, history suggests the odds favor deeper economic weakness ahead. That increases the appeal of defensive trades—such as dividend-paying stocks, gold, or short-duration fixed income—especially if future data disappoints.

Trading Strategies to Consider

For Equity Traders

Rate cuts typically boost equity valuations, particularly in high-beta and growth names. However, weak labor data and sticky inflation point to uneven performance. Focus on sectors with pricing power (energy, healthcare) and consider barbell strategies that combine growth with defensives.

For Bond Traders

Short-end yields may decline further if the Fed delivers expected cuts. Long-duration bonds carry more risk if inflation proves persistent. Consider flattening curve trades or positioning in 2–5 year Treasuries to benefit from the Fed’s slow easing cycle.

For Currency Traders

A dovish Fed should weigh on the U.S. dollar, particularly if other central banks (like the ECB or BoJ) maintain tighter policy. Watch USD/JPY and EUR/USD for volatility around Fed communications. Carry trades may remain attractive, but only if inflation stays in check.

Risks to the Market Narrative

While the base case points to two additional cuts this year, several risk scenarios could disrupt the current market consensus:

• Inflation surprise: If core inflation reaccelerates, the Fed could pause or even reverse cuts, catching markets off guard.
• Labor collapse: A sharp drop in employment could force faster and larger cuts—bad news for risk assets as it would signal deepening economic stress.
• Political developments: Trade or fiscal policy shifts under a potential second Trump administration could change the inflation outlook or modify the path of government spending, directly affecting the Fed’s policy approach in 2026 and beyond.

Market Forecast: Cautiously Bullish on Rate Support

Given current data and market positioning, the most realistic path forward is:

• October: 25bps rate cut (highly probable)
• December: One more 25bps cut, if labor data continues weakening
• 2026: Possibly one or two small cuts, bringing the Fed funds rate toward a “neutral” level around 3.5%

This scenario is moderately bullish for equities and short-term bonds, and mildly bearish for the U.S. dollar. However, the upside is capped by inflation constraints, and recession risks remain elevated based on historical precedent.

Bottom Line for Traders: The Fed is threading the needle between supporting jobs and fighting inflation. Expect gradual easing—not dramatic intervention. Use the predictability to plan range-bound strategies and avoid highly leveraged directional bets.