Zacks Investment Management

James M. from Phoenix, AZ asks: Hi Mitch, The Fed rate cut was big news in markets last week, and I’m wondering if you think this is the start of a bigger cycle with multiple cuts? If that’s the case, I would think we’d see a much more stimulated economy and a bull market. What do you think? Thank you.

Mitch’s Response:

Allow me to put a technical point on your question before answering it in full. You wrote that we may be at the start of a ‘bigger cycle with multiple cuts,’ but the Fed’s recent 25 basis point cut is actually the fourth cut in a year, so we’re technically still within an easing cycle.

But to your broader question, there is now plenty of debate over when and/or how many cuts are on the way. Some expect a cut at every remaining meeting this year for a total of five additional interest rate reductions in this cycle. Others think the Fed will move more cautiously.¹

My take goes in neither direction, as trying to forecast the Fed’s exact path is usually a recipe for being wrong. Markets, the media, and even the Fed itself have a spotty record of predicting where rates will go in the next few meetings. In early 2022, for instance, Fed officials were saying there was no need to hike aggressively because inflation was “transitory.” Not long after, they launched the steepest hiking cycle in decades.

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Investors, too, often swing between expecting a rapid series of cuts and then scaling back those expectations as new data rolls in. That’s been the case since rate cuts started in 2024.

At present, we’re seeing this prediction/forecasting game play out again, with futures markets currently pricing in rates falling to just below 3% by the end of 2026, which would be a faster pace than the Fed’s own “dot plot” projects. Fed officials, by contrast, see policy ending next year closer to 3.4%. That gap matters because if the Fed proceeds more cautiously than markets anticipate, borrowing costs could rebound and sentiment could shift quickly, as we saw last year when Treasury yields spiked higher even after a series of Fed cuts.

The important point is that Fed decisions are reactive, not preordained. Officials respond to the data in front of them, i.e., jobs, inflation, and growth. Right now, inflation is still above target, while job growth has slowed but remains positive. That mix arguably justifies a modest cut, but by no means offers a strong case for an aggressive series of cuts.

It’s also crucial to keep perspective on what these moves mean. The Fed only sets short-term rates. Longer-term borrowing costs are set by markets, influenced by inflation expectations, and can be impacted by government borrowing. We’ve seen plenty of instances where the Fed cut rates, but long-term yields actually rose. That disconnect can limit how much relief borrowers feel, even in a cutting cycle.

For stocks, the evidence tells us not to overcommit to the impact of Fed moves. History tells us that when the Fed cuts rates into an economic expansion, which is what we have today, in my view, that markets tend to do well in the following 12 months. But it’s also true that markets are driven by other key fundamentals like corporate earnings, consumer spending, and global growth. These factors matter more than the latest tweak to the fed-funds rate, and it’s where investors should keep their focus.

We may see another cut or two this year. Maybe more, maybe less. But I’d caution against trying to map out the entire cycle or pinning market expectations on the Fed. Cuts can matter at the margins, especially if they steepen the yield curve and help lending. But the bigger drivers of returns remain the same: the health of the economy, company profits, and investor sentiment.

Markets will keep debating how many cuts are coming, but history shows investors often get it wrong. Rather than trying to outguess the Fed, the smarter move is to focus on avoiding common mistakes when volatility rises.

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