Investors' Certainty Over Fed Cut Masks Looming Disappointment

JPMorgan Chase has issued a warning that the Federal Reserve’s upcoming interest rate cut, if executed as scheduled, could provoke a “buy the rumor, sell the news” reaction in financial markets. The bank’s analysts argue that the market may be overestimating the benefits of the cut and underestimating the potential for disappointment once the actual policy adjustment is implemented. Such a scenario could lead to a sell-off as investors recalibrate expectations after the rate cut becomes reality [1].

This warning comes amid broader economic uncertainty and signs of a cooling labor market. The latest nonfarm payrolls data showed a modest increase of just 22,000 in August, with downward revisions to earlier months pushing the June figure into negative territory. These developments have led to a near-unanimous expectation among investors that the Fed will implement a rate cut in September. According to the CME FedWatch Tool, traders are pricing in a 100% probability of a cut, with an 11% chance of a larger-than-anticipated 50 basis point reduction [3].

Despite the expectation of a rate cut, JPMorgan emphasizes that the broader economic environment remains fragile. The Federal Reserve has already reduced the Fed Funds rate by 1% since late 2024, but despite this easing, borrowing costs for most consumers and businesses have risen. Mortgage rates and the yield on the ten-year U.S. Treasury have increased by approximately 0.5%, reflecting tighter financial conditions for the majority of borrowers. This trend is also evident in the corporate bond market, where spreads between BBB-rated bonds and U.S. Treasuries have tightened to historically low levels, signaling a bullish sentiment that may not be fully justified given the economic risks [2].

The bank’s concerns are further reinforced by recent economic data showing signs of economic slowdown. Inflation remains above the Fed’s 2% target, while labor market conditions are deteriorating. Payroll growth has slowed significantly, and the labor force participation rate has fallen by 0.4% over the past four months, suggesting that some workers are exiting the job market due to a lack of opportunities. These trends raise the possibility of a recession, which could pressure the Fed to cut rates further in the coming months [2].

JPMorgan also highlights that historical patterns suggest a correlation between Fed rate hikes and eventual recessions. When the Fed has previously raised rates to curb inflation, the result has often been a slowdown in economic activity, which in turn has led to falling long-term interest rates. With the current economic outlook showing weakening employment and slowing growth, the risk of a recession remains a credible concern. This dynamic, combined with the expectation of further rate cuts, could lead to a market reaction where investors sell off assets following a cut, believing that the impact will be insufficient to stimulate economic growth [1].

The market is currently in a state of anticipation, with traders assuming that the Fed’s easing will support asset prices. However, JPMorgan warns that this assumption may be flawed if the actual economic response to the rate cut falls short of expectations. The firm urges investors to remain cautious, noting that a “buy the rumor, sell the news” scenario could play out, particularly if the Fed’s actions fail to restore confidence in the economy [1].

Source: [1] Wall Street sees September rate cut as sure thing — CPI inflation data may have a lot to say about what comes next (https://www.marketwatch.com/story/wall-street-sees-september-rate-cut-as-sure-thing-cpi-inflation-data-may-have-a-lot-to-say-about-what-comes-next-e530b506?mod=home_ln) [2] Don't Be Fooled: The Fed's Rate Cuts Are Making Things Worse for Borrowers (https://www.advisorpedia.com/strategists/dont-be-fooled-the-feds-rate-cuts-are-making-things-worse-for-borrowers) [3] Wall Street sees September rate cut as sure thing — CPI inflation data may have a lot to say about what comes next (https://www.marketwatch.com/story/wall-street-sees-september-rate-cut-as-sure-thing-cpi-inflation-data-may-have-a-lot-to-say-about-what-comes-next-e530b506?mod=home_ln)