Federal Reserve Rate Cut Bets Fuel Market Downturn, S&P 500 Futures Down 15%

Financial markets are experiencing a significant downturn, with expectations growing that the Federal Reserve will soon intervene to provide support. Bitcoin, the leading cryptocurrency by market value, has seen an 8% decline, trading at $75,800. U.S. stocks are on track for their worst three-day performance, with S&P 500 futures down roughly 5% on Monday alone and losses approaching 15% overall.

The Federal Reserve has a history of intervening during financial meltdowns with rate cuts and other stimulus measures. Traders, accustomed to liquidity support, are betting that the Fed will act similarly this time. The federal funds futures market is now pricing in as many as five rate cuts in 2025. For the upcoming May 7 meeting, there's a 61% probability of a 25 basis point cut, which would lower the target range to 4.25–4.50%. By year-end, the market sees the fed funds rate falling as low as 3.00–3.25%.

The risk-off sentiment, coupled with growth concerns and Fed rate cut bets, is driving down Treasury yields. The 10-year yield, a benchmark for the U.S. economy, has dropped to 3.923%. This decline is seen as beneficial for the Treasury, making it easier to refinance trillions of dollars in debt in the coming 12 months. This urgency stems from a policy shift under former Treasury Secretary Janet Yellen, who moved from longer-dated coupon issuance to short-term Treasury bills. Since 2023, about two-thirds of the deficit had been financed through bill issuance, creating a ticking time bomb of expensive short-term debt that now needs to be rolled over.

The credit market is now anticipating up to five rate cuts in 2025, indicating a significant shift in expectations for Federal Reserve policy. This shift comes as global markets experience a dramatic downturn, with the U.S. equity market in freefall. The U.S. stock-index futures are down nearly 4% for the S&P 500 and 4.6% for the Nasdaq 100, signaling a severe market correction. The commodities market is also feeling the strain, with WTI crude oil breaking below $60 and copper prices dropping over 5%, indicating a significant decline in global demand and a potential global recession.

The current market turmoil is exacerbated by the escalating trade tensions between the U.S. and China. China has imposed 34% tariffs across the board and added rare earth export controls, marking a shift from tit-for-tat measures to more aggressive economic warfare. The U.S.-listed China ADR index collapsed 8.9% on Friday, the worst drop since October 2022, and local equity markets are bracing for further volatility. The yuan has weakened to its lowest level since February, with speculation that Beijing may allow further depreciation to absorb the tariff shock. This could lead to increased FX volatility and potential outflows from broader emerging markets.

The Federal Reserve, under the leadership of Jerome Powell, finds itself in a challenging position. While Powell has acknowledged the inflationary and recessionary effects of the tariffs, he has not signaled any immediate policy changes. The Fed's inflation mandate is forcing it to maintain a tight policy stance, even as asset prices plummet. This lack of a "policy put" or immediate intervention is contributing to the market's freefall, with no clear support from the Fed, Congress, or the White House.

The market's current state is not just a trade dispute but a systemic repricing of the global economic order. The tariffs effectively act as a massive backdoor tax hike, and without fiscal offsets such as retroactive tax cuts or targeted consumer relief, the economic spiral could worsen. The administration's stance of "holding course" is not reassuring markets, which are experiencing real-world financial shocks that will impact household budgets, portfolios, hiring decisions, and capital flows.

The market's liquidity-driven shakeout is feeding on itself, with no clear policy lifeline in sight. The damage seen in the market is historic, with $5.4 trillion in S&P market cap lost in two sessions. This level of selling is comparable to major market crashes such as the 1987 crash, the Global Financial Crisis, and the Covid meltdown. Valuations are being mechanically compressed in real time, with high-multiple names, especially in tech, being repriced hard as forward earnings are slashed and growth expectations are revised downward. Credit spreads are widening, with junk bonds leading the charge, indicating increased default risk in the system.

The market's current state is not a temporary blip or tantrum but a broader regime shift. Policymakers have chosen chaos over clarity, leading to a full-blown rethink of what risk assets are worth in this new environment. The market is searching for a bottom with no policy lifeline in sight, making the situation even more precarious. Traders should brace for more pain until there is a clear off-ramp, such as a pause, a pivot, or a coordinated backstop.