The Fed’s September Rate Cut: A Near Certainty and Its Implications for Equities and Treasuries

The Federal Reserve’s September 2025 rate cut is now a near certainty, with markets pricing in an 89% probability of a 25-basis-point reduction [2]. This decision, driven by a softening labor market and inflation trending toward the 2% target, marks a pivotal shift in monetary policy after years of tightness. Yet, the implications for equities and Treasuries—and the need to hedge against political and inflationary risks—demand careful analysis.

The Case for the September Cut

The Fed’s pivot is rooted in deteriorating labor market conditions. Payroll job growth has averaged just 35,000 per month in Q2 2025, down from 168,000 in 2024, while downward revisions to prior months’ data have erased 258,000 jobs [4]. Despite a 4.2% unemployment rate, labor force participation has declined, and immigration-driven growth has slowed, creating a “curious kind of balance” between supply and demand [1]. Meanwhile, inflation has moderated: core CPI stands at 2.9%, and housing services inflation continues to fall [2]. Fed Governor Christopher Waller has explicitly endorsed the cut, arguing it is necessary to prevent further labor market deterioration [1].

However, risks remain. The Fed remains cautious about inflation, which, though declining, is still above target. Political headwinds, including Trump’s tariff policies, could reignite inflationary pressures through supply chain disruptions [3]. Chair Jerome Powell has emphasized that the cut is not politically motivated but a response to economic data [6].

Equity Market Implications

Historically, equities have thrived in the wake of rate cuts. Since 1980, the S&P 500 has averaged a 14.1% return in the 12 months following the first cut, with stronger gains in non-recessionary environments [5]. The index has already hit record highs in late August 2025, buoyed by resilient corporate earnings despite tariff-related challenges [4]. A September cut could further support equities, particularly in sectors like consumer discretionary, healthcare, and technology [5].

Yet, volatility is a concern. The first three months after a rate cut often see market turbulence as investors adjust to new signals [6]. A barbell strategy—combining high-growth tech stocks with defensive sectors like utilities—could balance growth and stability [5].

Treasury Yields and Duration Strategies

Treasury yields are expected to decline, but the yield curve’s behavior will hinge on economic conditions. The 2-year yield typically falls more sharply during rate cuts, while the 10-year yield may lag or even rise, as seen in 2024 when strong growth offset rate cuts [3]. Investors should prioritize intermediate-duration bonds (3–7 years), which historically outperform in benign rate-cut cycles [4]. Long-dated Treasuries, however, face headwinds from weak demand and U.S. debt concerns [1].

Hedging Against Uncertainty

Political and inflationary risks necessitate a diversified hedging approach. Gold, while a mixed inflation hedge historically, has surged in 2025 due to geopolitical tensions and dollar devaluation [2]. Central banks have added over 1,000 tons of gold annually since 2022, signaling its strategic value [2]. Investors should allocate 5–10% to gold, complemented by Treasury Inflation-Protected Securities (TIPS) and commodities like energy and industrial metals [2].

For capital preservation, zero-coupon bonds paired with call options can mitigate equity downside risks [4]. Hedge funds and alternative assets also offer alpha in volatile environments [2]. Corporations should consider forward contracts like Treasury locks to hedge future debt costs amid rate uncertainty [5].

Conclusion

The Fed’s September cut signals a shift toward accommodative policy, but its success depends on navigating inflationary and political risks. A balanced portfolio—combining equities, intermediate Treasuries, and inflation hedges—can capitalize on the Fed’s easing while mitigating downside risks. As history shows, patience and diversification remain key in navigating the fog of monetary uncertainty.

Source:
[1] Fed's Waller sees rate cuts over next 3-6 months, starting in September [https://www.reuters.com/business/finance/feds-waller-sees-rate-cuts-over-next-3-6-months-starting-september-2025-08-28/]
[2] The Fed's September Rate Cut: Strategic Implications for ..., [https://www.ainvest.com/news/fed-september-rate-cut-strategic-implications-equity-commodity-markets-2508/]
[3] Why Have 10-Year U.S. Treasury Yields Increased Since the Fed Started Cutting Rates [https://www.jpmorgan.com/insights/markets/top-market-takeaways/tmt-why-have-ten-year-us-treasury-yields-increased-since-the-fed-started-cutting-rates]
[4] Fed Rate Cuts & Potential Portfolio Implications | BlackRock [https://www.blackrock.com/us/financial-professionals/insights/fed-rate-cuts-and-potential-portfolio-implications]
[5] Navigating the Fog of Fed Uncertainty: Strategic ... [https://www.ainvest.com/news/navigating-fog-fed-uncertainty-strategic-implications-equities-bonds-2508/]
[6] United States Fed Funds Interest Rate [https://tradingeconomics.com/united-states/interest-rate]