Rate Cut Fantasy? Jerome Powell Is About to Serve a Cold Dose of Reality

 

Jerome Powell is more likely to crush Wall Street's rate cut fantasies than to cave into their demands for easy money.  Investors betting on deep rate cuts are about to get a brutal lesson in Powell’s dedication to inflation control, not market euphoria.

When it comes to the Federal Reserve, investors may be getting their hopes up only to have them dashed. Like someone getting dressed for a party that might not happen, the anticipation of a rate cut has set investors abuzz. Yet, just as someone might say, "Don't count your chickens before they hatch," the assumption that Jerome Powell will bring a feast of rate cuts could end in disappointment. For while the market seems to be pricing in a sure-fire rate cut after the Fed’s September 18th meeting, Powell may yet surprise everyone—not by slashing rates more than expected but by holding firm, if not hawkish, in his stance.

This isn’t a baseless notion. Powell has a history of zigging when markets expect him to zag. Look at how investors reacted over the past two years to the Federal Reserve’s aggressive interest-rate hikes—the fastest series of increases since the 1980s. While stock markets have swooned every time it seemed interest rates might stay higher for longer, Powell has consistently shown that taming inflation and keeping the economy steady are his top priorities. Even as speculation about a rate cut builds, Powell has every reason to continue prioritizing inflation over Wall Street’s desires.

Investors are banking on a 40% chance of a 0.25 percentage point cut and a 60% chance of a 0.5 point cut, yet history suggests they might want to temper their enthusiasm. “Buy the rumor, sell the fact” is a mantra that rings truer in times of economic uncertainty, and while the prospect of rate cuts might set pulses racing, their actual arrival often brings a bitter taste. Just look at how rate cuts have panned out in the past: Alan Greenspan’s Fed of the 1990s saw markets flourish with cuts, but the story has been much less pleasant in the 21st century. Rate cuts in the early 2000s came just as the dotcom bubble burst, and the cuts starting in 2007 coincided with the global financial crisis.

Even the cuts of 2019, which briefly boosted share prices, were overshadowed by the onset of the COVID-19 pandemic. Rate cuts alone don’t guarantee a happy ending for investors—something Powell is keenly aware of. In fact, he knows all too well that cutting rates isn’t always the best medicine for an ailing economy, especially when inflation remains a lurking threat.

There’s an additional wrinkle in the current situation. When Milton Friedman warned of the “long and variable lags” in monetary policy’s impact, he couldn’t have foreseen just how significant those lags might become in today’s environment. As the Fed prepares to potentially loosen policy, many companies and consumers will still be grappling with higher borrowing costs. Businesses that loaded up on cheap fixed-rate debt when interest rates were near zero will eventually face the harsh reality of refinancing at much steeper rates. Likewise, homeowners with fixed-rate mortgages who need to refinance will find themselves staring down higher monthly payments, even as the Fed looks to ease.

The truth is, rate cuts may not pack the punch they once did. With the cost of borrowing still elevated and inflation lurking, the Fed’s largesse may not translate into the stock market rally investors expect. Even more troubling, the expectation for rapid cuts—traders are pricing in 1.25 percentage points of cuts by the end of the year, followed by another 1.25 next year—has only occurred in times of economic crises or recessions. Are we heading toward such a scenario? Perhaps. Or perhaps Jerome Powell knows better than to let market expectations dictate his policy decisions.

If we look at Powell’s history, he has often been more hawkish than the market predicted. As early as 2021, Powell made it clear that inflation wasn’t just a “transitory” issue, as many had believed. His hawkish stance caught many by surprise, and since then, he’s shown little hesitation in holding firm to his goals, even if it causes temporary market pain. Powell’s goal has never been to please Wall Street—it’s to ensure long-term economic stability, and that might mean disappointing investors who are betting on quick and deep rate cuts.

The lesson here is that while rate cuts may appear to be a silver bullet for investors, the reality is far more complex. The stock market might get a brief bump from reduced borrowing costs, but that effect is often drowned out by other factors—economic uncertainty, rising debt costs, and most importantly, the fact that investors have already baked the benefits of these cuts into current prices. When markets expect a rate cut and get it, there’s little room left for upside. In fact, Powell could pull a fast one and issue a smaller cut than expected, or none at all, leaving traders scrambling.

And let’s not forget: Powell has a lot on his plate beyond just placating the stock market. Inflation, while cooling, is still above the Fed’s 2% target. The labor market, while no longer as red-hot as it was, remains strong enough to support higher interest rates for longer. So why should Powell rush into rate cuts just to soothe Wall Street? He might do just the opposite, holding firm or offering only a token cut to keep inflation in check and the economy steady, even if it means disappointing investors.

In the end, the Federal Reserve is not beholden to market whims. Powell’s mandate is clear—keep inflation low and ensure economic stability, even if it means sacrificing short-term gains in the stock market. Investors betting on a dovish Fed might find themselves in for a rude awakening. As the proverb says, “The early bird gets the worm, but the second mouse gets the cheese.” Jerome Powell may very well be that second mouse, taking his time and not rushing to cut rates as deeply or as quickly as the market desires. Investors might want to brace for a hawkish surprise.

If Powell does surprise on the hawkish side, well, perhaps investors can take solace in the fact that even when you don’t get what you want, you sometimes get what you need. But for now, Powell might be more interested in keeping a tight grip on inflation than delivering gifts to Wall Street—making the Fed’s September 18th meeting less of a party and more of a cautionary tale. Because in the world of central banking, it’s not always about making investors happy; sometimes, it’s about showing them who’s boss.