Fed Signals More Cuts: Interest Rates to Drop Again in October

The Federal Reserve’s pivot toward easing continues to dominate headlines, with markets pricing in near-certainty for another 25 basis point rate cut at the October 28-29 FOMC meeting. Fresh signals from Chair Jerome Powell’s Jackson Hole echoes and September’s initial trim,from 5.25% to 5%,have solidified expectations, potentially steering the federal funds rate to 3.75%-4% by year-end. This trajectory reflects a delicate balancing act against persistent inflation at 2.4% and a labor market flashing early cracks amid the ongoing government shutdown.

Powell’s semiannual testimony to Congress last week underscored the rationale: “Data-dependent doesn’t mean data-denied.” Delayed nonfarm payrolls due to the shutdown,now in its sixth day,have amplified reliance on private indicators like ADP’s tepid 98,000 job additions for September, well below the 180,000 consensus. Unemployment ticked to 4.3%, its highest since 2021, while JOLTS job openings plunged 15% to 8.1 million, signaling cooling demand. GDP growth forecasts for Q3 have been shaved to 1.8% by Goldman Sachs, down from 2.5%, as consumer spending wanes under high borrowing costs.

Bond markets are abuzz. The 2-year Treasury yield dipped to 3.6%, its lowest in 18 months, while fed funds futures embed a 92% probability of the October cut, per CME FedWatch. “The Fed’s walking a tightrope: too much easing risks re-igniting prices, but inaction could tip recession,” noted Evercore ISI’s Krishna Guha in a client memo. Dovish whispers from Governors Waller and Goolsbee hint at a November follow-up, possibly 50 basis points if shutdown fallout exposes deeper fissures.

Equity implications are bullish yet selective. The S&P 500 rallied 1.2% last week to 5,900, led by rate-sensitive sectors: real estate (XLRE) up 3%, tech (XLK) gaining 2% on cheaper capital for AI capex. Banks like JPMorgan shed 1.5% on NIM compression fears, while growth stocks like Nvidia soared 5% anticipating lower discount rates boosting valuations.

Globally, the move ripples. The ECB, eyeing its own 25bp cut on October 17, aligns with the Fed to avert dollar surges hammering EM currencies. India’s RBI held at 6.5% but signaled flexibility, while China’s PBOC injected $140 billion in stimulus to counter export drags.

Risks abound: if inflation rebounds via supply snarls from the shutdown, hawks like Daly could balk. Yet, with corporate debt refinancings at $1.2 trillion looming, cuts offer relief. “This is monetary insurance against a hard landing,” Powell affirmed. As October unfolds, the cut isn’t just likely,it’s the linchpin for a soft economic touchdown, fueling hopes for a 2026 rebound. Investors, strap in: lower rates mean higher multiples, but volatility’s the toll.