As the U.S. Federal Reserve prepares to begin its rate-easing cycle, investors and analysts predict that future interest-rate cuts may be less aggressive than market expectations due to ongoing economic strength.
Although there is speculation of either a 25 or 50 basis-point cut on Wednesday, experts suggest that deeper cuts would only occur in the case of a recession.
While markets are pricing in a sharp drop in rates, with around 240 basis points of cuts by the end of 2025, economists believe that current economic indicators—such as stable corporate earnings and a strong labor market—point more towards a slowdown than a recession.
As a result, a shallower rate-cutting cycle, resembling that of the 1990s, may be more likely than the deep cuts seen during the 2007-2008 financial crisis.
The bond market has aggressively priced in rate cuts, anticipating a decline in economic growth.
However, experts warn that inflation may persist, complicating the Federal Reserve’s strategy to balance rate cuts with controlling inflation, especially if corporate earnings and employment continue to show resilience.