Following a disappointing jobs report for August, anticipation is mounting that the Federal Reserve will reduce interest rates by 25 basis points during its upcoming policy meeting. Some investors are even speculating about a more substantial cut, hoping that a more dovish stance from the Fed will help revitalize a stock market that has seen turbulent fluctuations throughout the summer months.
Despite this optimism, several Wall Street analysts express reservations about the potential consequences of rate reductions on equity markets in the near term. Ed Yardeni, president and chief investment strategist at Yardeni Research, conveyed concerns that a shift in monetary policy could result in an unstable “melt-up” of stock prices without addressing significant labor supply issues exacerbated by previous immigration policies and a demographic shift towards an older population.
Yardeni argued that the Fed’s rate cuts would stimulate an economy that may not require additional liquidity, suggesting that this could lead to a speculative rally fueled more by investor anxiety than underlying economic fundamentals. He remarked, “Stimulating an economy that doesn’t need stimulation won’t create more workers to address the undersupply that’s constraining the demand for labor.”
Stuart Kaiser, who leads U.S. equity trading strategy at Citi, echoed similar concerns, citing August’s weak payroll figures as a “negative growth signal” that might overshadow the positives of anticipated interest rate cuts. He warned that ongoing slow hiring and a potential rise in unemployment could exert more pressure on corporate earnings and economic growth than any temporary boost from looser monetary policy.
Adding to the caution, Apollo’s Torsten Sløk highlighted significant job losses in sectors affected by tariffs, including manufacturing, construction, retail, and transportation. This negative employment trend underscores the growing difficulties businesses face amid trade policy uncertainty.
Inflation poses another complication for the Fed’s decision-making. The upcoming Consumer Price Index (CPI) announcement is anticipated to reveal trends in price movements, with Bloomberg consensus forecasting a 0.3% month-over-month increase in core CPI for August, which would keep inflation well above the Fed’s target of 2%. Citi analysts noted that a significant upside surprise in inflation could deter aggressive monetary easing, and any signals of renewed pricing pressure could limit the Fed’s latitude.
Reflecting on the current economic climate, Morgan Stanley’s Mike Wilson mentioned that the stock market’s ability to withstand a weakening labor market will depend on the Fed’s response. He warned that despite weak job data not being catastrophic, the central bank’s options for easing may be restricted, potentially leading to volatile price movements through the historically sluggish months of September and October.
On a more positive note, Wilson believes that any downturn could set the stage for a stronger market finish as the year progresses, buoyed by what he sees as a likely earnings recovery. Meanwhile, Goldman Sachs’ David Kostin foresees a more optimistic scenario. He noted that stocks tend to rise during Fed rate-cut cycles, provided the economy avoids recession, which he does not anticipate as the most likely outcome. Kostin projects that the S&P 500 could reach 6,600 by year-end, driven by renewed earnings growth in 2026 and expected improvements for small-cap stocks that have lagged behind under elevated interest rates.
Overall, as markets brace for the Fed’s potential interest rate cuts, investors and policymakers remain watchful of the labor market, inflation trends, and overall economic indicators, questioning whether the expected moves will be sufficient to counter the emerging growth risks.
