The Case for Aggressive Rate Cuts and Their Implications for Equities and Gold

The Federal Reserve’s cautious approach to rate cuts in 2025 reflects a delicate balancing act between stubborn inflation and a cooling labor market. As of September 2025, the central bank has maintained the federal funds rate within the 4.25–4.50% range but signaled two cuts by year-end, projecting a reduction to 3.9% [3]. This trajectory is driven by a slowing economy, with the unemployment rate rising to 4.3% in August and job growth contracting to 22,000 new hires [5]. Meanwhile, core PCE inflation remains elevated at 2.7%, far above the 2% target, while trade policy uncertainties—particularly tariffs on Chinese imports—have further complicated the outlook [6].

Equities: A Mixed Outlook in a Stagflationary Climate

Equities face a dual challenge in this environment. On one hand, rate cuts typically support risk assets by lowering borrowing costs and boosting corporate profits. On the other, stagflation—a combination of high inflation and weak growth—has historically pressured equity valuations. For example, during the 1970s stagflation and the 2008–2011 financial crisis, equities underperformed as investors fled to safer assets [3].

The current landscape mirrors these dynamics. While the S&P 500 has remained flat since the last rate cut in December 2024, the broader market is grappling with fiscal uncertainty and a projected U.S. deficit of 6–7% of GDP [2]. Analysts at Schwab caution that trade policy risks, including tariffs, could further dampen global equity performance [5]. However, non-U.S. markets—particularly Asia ex-Japan—remain attractive due to weaker dollar dynamics and undervalued sectors [1].

Gold: A Time-Tested Hedge Against Uncertainty

Gold, by contrast, has thrived in this environment. The precious metal has surged 31% year-to-date in 2025, reaching $3,429/oz, driven by geopolitical tensions, a weaker dollar, and expectations of lower rates [1]. Historical precedents reinforce its role as a stagflationary hedge: during the 1970s, gold rose from $35/oz to over $800/oz as inflation spiked and the dollar weakened [3]. Similarly, in 2008–2011, gold nearly tripled in value amid financial turmoil [3].

J.P. Morgan forecasts gold to average $3,675/oz in Q4 2025 and climb toward $4,000/oz by mid-2026, citing robust central bank demand (projected to reach 900 tonnes in 2025) and ETF inflows [4]. This trend is further supported by gold’s inverse relationship with interest rates: as rates fall, gold’s appeal as a zero-coupon, non-liability asset grows [2].

Rebalancing for Resilience: A Strategic Shift

Portfolio rebalancing in this climate demands a nuanced approach. While equities remain a long-term bet, investors should prioritize defensive sectors and low-volatility strategies in the near term [3]. Gold, meanwhile, offers a compelling diversification tool. Morgan Stanley recommends allocating 5–10% of portfolios to gold to hedge against inflation and currency devaluation [2]. This aligns with broader strategies that include inflation-linked bonds and infrastructure investments, as outlined in the 2025 Spring Investment Directions [3].

The case for gold is further strengthened by its performance during extended Fed pauses. In mid-2025, gold outperformed the S&P 500 by 25%, a pattern observed in previous cycles such as 2002–2003 and 2019–2020 [5]. As the Fed contemplates aggressive cuts—potentially a 50-basis-point move in September—gold’s role as a safe haven is likely to expand [5].

Conclusion: Preparing for a Stagflationary Future

The interplay of Fed rate cuts and stagflationary pressures necessitates a proactive rebalancing of risk exposure. While equities may benefit from lower rates, their vulnerability to inflation and trade policy risks cannot be ignored. Gold, with its historical resilience and current momentum, offers a critical counterbalance. Investors who adjust their allocations now—prioritizing gold, defensive equities, and inflation-linked assets—will be better positioned to navigate the uncertainties ahead.

Source:
[1] Gold Market Commentary: Stubborn stagflation [https://www.gold.org/goldhub/research/gold-market-commentary-august-2025]
[2] Rising Inflation May Challenge Stocks [https://www.morganstanley.com/ideas/reflation-fed-rate-cut-december-2024]
[3] Gold Price Performance in Global Markets [https://www.bestbrokers.com/gold-trading/gold-price-performance-in-global-markets]
[4] A new high? | Gold price predictions from ... [https://www.jpmorgan.com/insights/global-research/commodities/gold-prices]
[5] 2025 Mid-Year Outlook: U.S. Stocks and Economy [https://www.schwab.com/learn/story/us-stock-market-outlook]