Global Markets Surge on Fed Rate Cut Anticipation

Investors have sent global equity markets climbing to fresh highs in recent weeks, betting aggressively on the Federal Reserve’s impending shift toward monetary easing. With the June Federal Open Market Committee (FOMC) meeting now framed as the likeliest starting point for rate cuts, the market’s pricing of a 75% probability of 75 basis points in reductions by year-end has fueled a risk-on rally. But beneath the surface of this optimism lies a fragile balancing act between inflation pressures, trade policy uncertainty, and the Fed’s evolving calculus. Let’s dissect the data driving this surge—and whether it can last.

The Fed’s June Crossroads

The June 17–18 FOMC meeting has emerged as the critical pivot point for markets. According to the CME Group’s FedWatch tool, traders are pricing in a 92% probability of a 25 basis point rate cut at that meeting, with odds of a May hold at 100% as the Fed adopts its trademark patience. This expectation is underpinned by the March 2025 Summary of Economic Projections (SEP), which revised 2025 GDP growth downward to 1.7% and raised core PCE inflation forecasts to 2.8%—both outcomes reflecting the drag of trade policy uncertainty.

The Fed’s communications strategy has been deliberate: Chair Powell’s repeated emphasis on “waiting for clarity” on tariffs and inflation has kept markets focused on June as the first step toward easing. A would show this expectation crystallizing over the past quarter.

Why Inflation Still Matters

Despite the market’s eagerness for cuts, the Fed remains cautious. The 2.8% core PCE projection—the Fed’s preferred inflation gauge—reflects concerns about tariff-driven price pressures. While headline inflation has retreated from 2022’s 9.1% peak, the 10-year Treasury yield’s recent surge to 3.8% (a full percentage point above December’s lows) highlights how bond markets are pricing in persistent inflation risks.

This disconnect between short-term Fed policy and long-term bond yields is critical. Mortgage rates, tied to these yields, now exceed pre-2024 cut levels by 125 basis points, even as the Fed holds its benchmark rate steady. A would underscore this divergence, which has stymied housing demand and complicates the Fed’s path.

Trade Policy: The Wild Card

President Trump’s trade disputes remain the largest overhang. Initial tariff announcements in late 2024 briefly depressed bond yields as investors priced in slower growth, but subsequent escalation sent yields spiking—a pattern analysts have dubbed the “tariff volatility cycle.” The Fed’s April 2025 decision to slow its balance sheet runoff—reducing Treasury sales to $5 billion/month—was a preemptive move to cushion markets against such shocks.

Investors should monitor U.S.-China trade negotiations closely. A breakdown in talks could reignite inflation fears, while a deal might accelerate the Fed’s easing timeline. Either outcome would reshape equity and bond markets overnight.

Sector Winners and Losers

The rate-cut narrative has already favored cyclical sectors. Banks, which benefit from steeper yield curves, have seen 15% gains in 2025 (as of April) despite pressure from lower short-term rates. Meanwhile, tech stocks—traditionally rate-sensitive—have rallied on hopes of cheaper capital, with the NASDAQ outperforming the S&P 500 by 8 percentage points year-to-date.

But not all sectors are beneficiaries. Utilities and REITs, which thrive in low-rate environments, have lagged, with the Utilities Select Sector SPDR Fund (XLU) down 5% since January. A would visualize this shift.

The Bottom Line: June’s Make-or-Break Moment

Markets are pricing in a June rate cut as a near-certainty, but the Fed’s credibility hinges on executing a smooth pivot. Three key data points will determine success:
1. Trade Policy Resolution: A reduction in tariff-related inflation pressures would validate the Fed’s easing path.
2. Labor Market Resilience: The unemployment rate’s 4.1% stability must hold without triggering wage-driven inflation.
3. Balance Sheet Flexibility: The Fed’s April 2025 balance sheet adjustments—reducing Treasury runoff—buy time, but further easing may require halting runoff entirely.

If the Fed delivers a June cut and signals further reductions, the S&P 500 could test 4,800–5,000 levels, with cyclicals leading the charge. But a misstep—a hawkish surprise in June or a trade deal that fails to ease inflation—could trigger a sharp correction.

Investors should prioritize sectors with pricing power (consumer staples, healthcare) and avoid duration-heavy assets until the Fed’s path is clearer. The June meeting won’t just be a rate decision—it’ll be a referendum on the Fed’s ability to navigate today’s economic crossroads. Stay vigilant.