U.S. economic data keeps coming back stronger than expected, and frankly it’s raining on the parade for markets.
For the majority of 2025, investors have been hankering after multiple base interest rate cuts from Jerome Powell and the Federal Open Market Committee (FOMC), knowing it would kickstart cheaper borrowing and foster economic activity. The general consensus was that once the Fed was confident enough to start cutting, it would spell a change in the weather: A move toward the greatly-anticipated “normalization” of the funds rate.
So when the FOMC cut in September this apparent fact was not only baked in by markets, but so too were the cuts expected to come for the rest of the year.
Unfortunately, the economy is faring far better than many estimated—meaning the Fed may not be forced into further action as quickly as anticipated.
Markets continued to struggle yesterday—the third day in a row—with Deutsche Bank’s Jim Reid noting: “The main catalyst was a strong batch of U.S. data, which meant investors dialled back their expectations for rapid Fed rate cuts, and pushed front-end Treasury yields higher. So that meant rate-sensitive sectors like tech took a hit, with the Magnificent 7 dragging down the broader equity market.”
Kevin Khang, Vanguard’s senior international economist, wrote in a note seen by Fortune this week: “It’s no surprise that every hint of a dovish Fed pivot is met with enthusiasm. But two realities about the yield curve—and the broader rate environment—are worth keeping in mind.”
“First, the short end of the curve will continue to be shaped by the Fed’s dual mandate of ensuring both price stability and maximum sustainable employment. Although inflation has come down meaningfully from its peak, it remains sticky. This is partly due to supply-side forces, including tariffs and an immigration slowdown.”
“At the same time, the labor market, though showing signs of softening, remains in balance by historical standards. These dynamics suggest that the Fed’s path to sustained rate cuts is narrow. With inflation poised to remain above its 2% target for a fifth consecutive year, the Fed is unlikely to ease the policy rate substantially—unless inflation somehow makes a more decisive move toward target sooner.”
“Our success in delivering on these goals matters to all Americans. We understand that our actions affect communities, families, and businesses across the country.”
Here’s snapshot of the markets ahead of the opening bell in New York this morning:
